Need more feedback before planning new taxes
Though the taxman undoubtedly has his reasons for the plethora of transfer pricing adjustment orders given, and being planned, it cannot be denied this is having an adverse impact on India’s image as an investment-friendly destination. On Tuesday, two big investors—Shell and Nokia—described the taxman’s demands as absurd and unacceptable. How could, Shell’s chief fulminated, the taxman issue a $1 billion demand on a $160 million infusion by Shell Gas BV into a loss-making Indian subsidiary four years ago? As FE has reported before, transfer pricing adjustment demands were around R1,220 crore in FY06 and these rose to R44,532 crore in FY12. Given the OECD’s call on Tuesday to crackdown on MNCs that dodge paying corporate taxes, chances are this will further strengthen the taxman’s resolve. While the main Vodafone case is not a transfer pricing one, the taxman appears to be digging in his heels here as well, given how the original demand for tax payments has been sent once again to the telco.
Perhaps it is now time to follow a different approach, on even what are considered to be routine tax matters, the kind followed by the government while introducing the GST, for instance, or even in the manner in which GAAR and retrospective taxation was to be dealt with—open up the process to public scrutiny and get as much public opinion as possible on the matter. In the case of extending the securities transaction tax (STT) to commodities, for instance, many have pointed out that the imposition of STT on the shares itself has resulted in exporting overseas a large part of the Indian market—a commodity tax will do the same for commodity markets. And if the transaction tax is to be extended to commodities, it is a matter of time before it is extended to currency markets or bond markets. Similarly, if foreign investors feel they are being victimised by the taxman, the implications of this are certain to be serious. Why not appoint a committee of tax experts, under FM advisor Parthasarathi Shome for instance, to examine the impact of such new taxes—or new/novel interpretations by the taxman—and have a public consultation process? Indeed, as is the case in some jurisdictions such as the UK, while formulating new tax proposals, it should be mandatory for the taxman to come up with some sort of an impact assessment as well. Slapping tax demands is all very well, but the track-record of actually collecting these—after these demands are contested at the tribunal and various courts—has to be an integral part of the exercise, apart from analysing the likely economic impact of the proposal. As someone who worked for the UK taxman, that’s something Dr Shome must be familiar with.