Meeting with Revenue Secretary on
NEW AND INNOVATIVE TAX POLICIES IDEAS
Tuesday, 6 October 2015
DIRECT TAXES
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Content
A.
Tax Administration - Shome Committee recommendations
B.
Corporate tax measures…
C.
Transfer Pricing measures
D.
Expatriates taxation – eliminate through “co-operative
compliance”
E.
Rates of TDS on Royalty and Fees For Technical Services
(‘FTS’)
F.
Taxation of consortium for setting up manufacturing plants
G.
Single tax regime for small manufacturing businesses
H.
Duty on SEZ clearance
I.
Creating 15 Billion Man-days of Employment and Reducing
Current Account Deficit by promoting Wood based Industry
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J.
“Make in India” : Encouraging Innovation to deliver Corporate
Initiatives for larger Societal Value Creation
K.
Incentivising world class Indian Brands – Job Creation and
Retention of Value in the Country
L.
Exclusion from eligible R&D expenses
M.
Incentivising R & D expenditure for promoting “Make in India”
manufacturing
N.
Creating large-scale Employment and Managing Food Inflation
through a thrust on Food Processing Industry
O.
Removal of Tax Distortions
P.
ICDS
Q.
Restriction on carry forward of losses under section 79 of the IT
Act for start ups
R.
“Smart City” project/ concept of the Hon'ble Prime Minister
S.
“Make in India” dream of Hon'ble Prime Minister
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A. Tax Administration - Shome Committee
recommendations
1.
Treat each Taxpayer as a customer of the Tax Department. Make
adversarial approach between taxpayer and department a thing of
the past.
2. Strengthen customer focus on taxpayer services and taxpayer
experience by prioritising the following administrative reforms:
 Merger of CBDT and CBEC into a single Central Board of Revenue
 Separate administrative functions from law-making.
 Adopt tax revenue gap analysis and bottom-up approach for fixing
revenue targets by region having regard to econometric modelling.
 Conduct impact assessment studies of various tax policy measures
 Conduct
industry sector wise research-based analysis of policy
considering trade flow trends.
 Tax department should not challenge tax payers choice of forum whatever
it is availing Advance Ruling, Settlement Commission etc.
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B. Corporate tax measures…
1. Accelerate announced reduction of overall corporate tax rate to 25% it could result in boosting foreign investment and growth
2. Withdraw ICDS or defer by a few years, since they conflict with
mandatory AS
3. Guidelines/ Circulars and other subordinate legislation should as a
rule be made available for public comment reasonably ahead of
provisions in the Act are introduced/ amended with likely impact on
industry sector over say five years.
4. Simplify TDS systems by calibrating rates for various TDS provisions
so that refunds are minimized.
5. Index threshold limits to Cost Inflation Index in TDS and other
provisions.
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Corporate tax measures (contd…)
6. Introduce provision to exempt applicability of TDS to profitable
Indian companies, and allow them to pay higher advance tax to
make up for TDS they would otherwise have collected. This will
reduce complexity and cost in determining and accounting for TDS,
filing returns, and issuing certificates. Law relating to deferring the
refund in scrutiny cases should not be applied where refunds arise
due to TDS.
7. Tax filing compliance of Expatriates to be allowed by employer
companies.
8. This is a form of “co-operative compliance” – a new paradigm
that aims to reduce compliance cost and effort, without revenue
sacrifice.
9. Simplify Rule 8D to be a percentage of exempt income if there is an
expense incurred on such activity; this will increase certainty and
reduce tax disputes
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Corporate tax measures (contd…)
10. POEM guidelines should –

Avoid situations where both countries may claim worldwide taxation
rights over a company’s income

Not to be made applicable to operating companies

Government should be prepared to have Indian subsidiaries claiming to
have POEM in a foreign jurisdiction to avoid being taxed in India

Underlying tax credit should be allowed.
11. Tax provisions for, and definitions of terms used in, international
taxation should be brought in line with international understanding
thereof – POEM, international transaction, royalty, inter-quartile
range, multiple year data, etc.
12. Cash economy should be curtailed by incentivising use of
credit/debit cards.
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13. To simplify taxation on businesses all computational / incentives
provisions be eliminated and calibrated, minimum alternate tax
rate may be prescribed initially for all tax payers who are required to
maintain accounts and to get them audited for tax audit purpose.
14. To make acquisition overseas by Indian companies
competitive underlying tax credit should be allowed to the investor
company against income received from such investments.
15. Re look at tax policy on expanding source rules based taxation
on services activities as India in future may not be exporter of
services.
16. To reduce litigation statement of intent of tax provisions be issued
by revenue giving a clear position on application of law under
typically encountered situations which if not followed may require
mandatory disclosure.
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C. Transfer Pricing measures
1.
Domestic transfer pricing should not apply to transactions by
Indian companies with other domestic related parties, both of
which are profitable; there are no adverse tax implications in such
cases
2. The safe harbour cut-offs are currently excessively high; they
should be revised downwards to effectively allow tax payers to avail
of these.
3. Safe harbour and rollback provisions should be made more
reasonable to encourage more companies adopt them having regard
to business dynamics.
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D. Expatriates taxation – eliminate through “cooperative compliance”
1. If “Make in India” gathers steam, there will be many more expats
coming into India on short to medium term assignments.
Eliminating tax compliances altogether in India for them would
go a long way in allaying their reservations in coming to India. They
should have hassle-free entry into and exit from India, no PAN
requirement, and no need to file tax returns.
2. Employer-companies should agree to pay (based on their payroll
records) the tax due on salary paid to expatriate employees while in
India, in a simple effective way.
3. There will be some complexity in determining whether there is a PE or
not, etc. which can be provided for.
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D.
Expatriates taxation – eliminate (contd…)
4. Adoption of “cooperative compliance” movement such as the above
will
 Reduce tax department’s time and allow them to concentrate resources
on high-risk taxpayers.
 Remove most current compliances – and that can yield significant cost
savings
 Free expatriates on short term to medium term assignments from all
tax compliances, which currently discourages to step into India
 Greater certainty relating to tax compliances
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E. Rates of TDS on Royalty and Fees For Technical
Services (‘FTS’)
With effect from 1st April 2013, TDS on royalty and fees for technical
services (‘FTS’) payable to non-residents was subjected to higher
income tax @ 25% of gross amount. This year Finance Act restored
the 10% rate.
However 20% rate of TDS comes into play when the supplier of
technology does not have a tax registration in India (PAN). Such high
withholding tax assume a profitability of over 50% which is unreal in
today’s competitive world and as such the supplier is unable to claim
credit in home country and invariably passes on the burden of taxes to
the Indian manufacturer thus making the manufacturing expensive in
India.
Accordingly, it is suggested that tax rate restored by the Finance Act
2015 to 10% be made applicable irrespective of PAN requirement. In
the alternative, certified copy of home country tax registration may be
considered sufficient in place of PAN.
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F. Taxation of consortium for setting up
manufacturing plants
Many large projects are undertaken by consortiums, where equipment
supply is performed by one of the members of the consortium. These
offshore supplies are not taxable as per the verdict of the Apex
Court. However, in the in recent past, it has been that such supplies
are now sought to be taxed by the tax department by treating the
consortium as an Association of Persons (AOP), resident in India. This
is being done even if there is no profit / loss or risk sharing between the
members and each member undertakes its portion of job at itys own
cost & risk. It is desirable that law should be amended to provide that
only such consortiums should be treated an AOP where the profit
sharing happens among the members.
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G. Single tax regime for small manufacturing
businesses
For small businesses (doing value addition upto say 25 crores), one
lumpsum tax should be worked out which should satisfy need of
payment of all taxes by such businesses. At the back end such tax
collected may be apportioned / distributed as needed. The process of
collecting such taxes should be simple and safe harbour rates for the
same be prescribed based on the expected total tax contribution (TTC)
by class of businesses in a Industry.
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H.
Duty on SEZ clearance
While SEZ policy was brought out to boost domestic manufacturing in a
hassle free way, the tax benefits have been substantially vittled down,
which is not encouraging manufacturing activity at all in SEZs. To
encourage India to be made a global manufacturing hub for various
items, particularly automobile cars, a domestic sale component is
necessary, but the high customs duty levied on domestic sales is a big
deterrent. This custom duty gets levied at a rate higher than lower FTA
rates on certain items and gets levied even on value added in India i.e.,
Indian labour, Indian material etc.
It is suggested that customs duty be levied on DUTY FOREGONE
BASIS on domestic sales from SEZ’s. Further, to keep distinction
between SEZ manufacturers and domestic manufacturers a
SURCHARGE may also be levied on SEZ manufacturers undertaking
domestic sales so as to counter the duty benefits availed by SEZ on
imported capital goods.
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I. Creating 15 Billion Man-days of Employment
and Reducing Current Account Deficit by
promoting Wood based Industry
•
India imports US$ 5 billion worth wood and wood-based products such
as furniture,construction timber, pulp & paper, packaging, plywood etc.,
largely from ASEAN countries due to very low import duty ranging from nil
to 5%.
•
The current tariff policy, which makes imported wood more attractive
than growing trees in India, prevents livelihood creation in the country and
“exports” the jobs to countries selling these products, simultaneously
putting pressure on the current account balance.
•
Agro-forestry provides innovative solutions to address food and wood
security by synergising tree growing with crop production optimizing landuse.
•
Given the multiple benefits of agro-forestry in creating employment,
enabling environmental replenishment, and new economic opportunities
particularly in rural India, policies must support the development of this
sector.
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It is recommended that:
•
Import duties be raised to 10 % for wood and woodbased products.
•
Extend agro-forestry all the benefits available to
agriculture including unrestricted movement of such
produce and long term institutional credits.
•
R & D for the evolution of improved wood species should
be extended aweighted deduction of 200 % of expenses for
income tax purposes. Tax benefits and incentives are also
required to locate industry near such plantations in rural
India.
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J. “Make in India” : Encouraging Innovation to
deliver Corporate Initiatives for larger Societal
Value Creation
•
In line with the Hon’ble Prime Minister’s call for qualitative and
sustainable industrial growth in the form of “Make in India : Zero
Defect and Zero Effect”, there is a strong need to encourage and
incentivise the immense transformational capacity of corporates in
innovating business models that can synergistically deliver economic
and social value simultaneously.
•
Sustainability in Business Development in its truest sense can
only take place when economic growth fosters social equity.Growth
must translate into the creation of sustainable livelihoods and
replenishment of scarce environmental resources. Limits to future
growth will be defined more by vulnerabilities flowing from social
inequities, environmental degradation, and climate change than by
any other economic factor.
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•
Government can support the development of a Responsible
Business “Trustmark” Rating System that could be used to convey to
the consumer a company’s environmental and social performance.
An enterprise could be awarded credits by way of “Trustmark
Rating”, based on an objective evaluation of its triple bottom line
performance. An accumulation of such credits could earn the
enterprise Trustmark Ratings on a progressive scale. These Ratings
could then be displayed on products and services of the company to
help consumers make an informed choice.
•
Government must consider the provision of a differentiated and
preferential set of incentives, fiscal or financial, to companies that
demonstrate leadership in sustainability performance.Companies
with high “Trustmark” ratings should be provided with incentives
like priority fast track clearances, purchase preferences, lower levies
of central excise duty for manufacture of “green”, eco-friendly
products and so on. This would spur powerful market drivers that
will incentivise innovation for larger triple bottom line impact.
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•
Banks and Financial Institutions could also factor in the
Trustmark Ratings in their lending operations providing benefits to
more responsible corporations. Going forward, it may even be
possible to trade in these “Trustmarks”, if a system similar to carbon
credits or energy efficiency certificates can be developed so that
organisations with surplus credits are able to monetise their efforts.
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K. Incentivising world class Indian Brands – Job
Creation and Retention of Value in the Country
•
Most of the high-end consumption spends by the affluent and middleclass is captured by foreign brands that dominate every segment of the
Indian global market.
•
Many of these foreign brands tend to import either the finished products
or major components rather than manufacturing them in India. This has
resulted in jobless consumption growth in India.
•
Indian entities that create employment opportunities and generate value
that is retained within the country must be supported for the development
of world-class brands.
•
These Indian entities deserve fiscal incentives since brand-building
entails large investments over a considerably long period of time. There is
need to create National Champions who will build Indian brands for India to
be internationally competitive through ownership of world-class intellectual
property. This is eminently possible as has been demonstrated by countries
like Japan & South Korea who were also in a similar situation. Now they
have several world-class global brands.
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•
It is recommended that Instead of providing weighted
tax deduction on R & D expenditure which is merely based
on inputs without any linkage to outcomes in the form of
consumer franchise, the incentives should be linked to
revenue generated through the sale of branded products.
For example, a percentage of sales of the Indian brands
should be the basis for crafting the incentive. (For this
purpose any brand owned by a registered entity in India,
whether owned by foreign or Indian capital, is an Indian
brand.)
•
In the long-run, India can become a sustainable hub of global
manufacturing only by the creation and ownership of world-class
intellectual capital.
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L.
•
Exclusion from eligible R&D expenses
The eligible R&D expenses are entitled to weighted deduction. It
is seen that the small and mid sized companies which need R&D at a
grass root level are unable to support full fledged end to end R&D
facility in-house. In such cases they engage outside agencies to
undertake certain functions required for such R&D. Presently the
expenses incurred on sourcing such functions are excluded
from being eligible for weighted deduction. This results in denial of
weighted deduction to them. It is recommended that the exclusion
of expenses incurred from eligible R&D expenses should not be
made as in today's world there are specialised agencies who
undertake such functions and it make sense to engage them.
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M. Incentivising R & D expenditure for promoting
“Make in India” manufacturing
•
The Income Tax Law currently provides for tax benefits in respect of scientific
research expenditure. However, there are a number of constraints in availing
such incentives. For example :
•
As per section 35(2AB), the benefit is not available for articles specified in the
eleventh schedule. This is highly discriminatory the in-house research and
development is not incentivised for all items. In fact, the absence of quality inhouse R & D significant expenses are incurred in respect of royalty payments for
use of imported technology, packaging / technical specifications etc. Another
direct fall out is the menace of contraband products.
•
The DSIR Guidelines has restricted the availability of the deduction. This
restriction should be corrected by including specific expenses like expenditure on
outsourced R & D, foreign consultancy, clinical trial etc.
•
The DSIR Guidelines are excessively restrictive. For instance, it specifically
states that to lodge a weighted claim the manufacturer should enter into an
agreement with DSIR for co-operation in such R & D. This provision should be
removed. Also, the guidelines state that the assets acquired and products
emanating out of R & D shall not be disposed off without approval of DSIR.
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N. Creating large-scale Employment and
Managing Food Inflation through a thrust on
Food Processing Industry
•
Spur demand growth in the Processed Food sector
through a tax free regime. Stay with this for long enough for
results to manifest in large scale employment and reduced food
inflation.
•
Higher demand will attract investment in food processing and
cold chains raising share of processing from 2% to 40% in line with
countries like Malaysia and Thailand.
•
The Food Processing sector value-chain has potential to
create over 9 million jobs, 60 % of which will be in rural
areas. These jobs will largely be in Small and Medium scale
enterprises contributing to regionally balanced employment through
the development of local supply chains as well as the agri-services
sector.
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•
Large-scale Food Processing will reduce agri-wastages, enhance
availability of food and bring down prices further whilst increasing
farm incomes.
•
Integrate local, regional and national
seamlessly by bringing down artificial inter-state
This will support Prime Minister’s vision of a
Agricultural Market by extending it to a
Agriculture and Food Market.
markets
barriers.
National
National
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O. Removal of Tax Distortions
•
The variety of taxes prevalent in the country – across the Centre, States
and Local Bodies – and their considerable differences across States and
Local Areas results in high compliance cost for industry and balkanisation of
the national market. This impedes the ability of industry to achieve
economies of scale.
•
The Goods and Services Tax (GST) will bring about transformational
change by way of unifying the national market, widening the tax base and
lowering the cost and complexity of taxes. However, GST will not address
the distortions that are created by local levies like Octroi, Local Body Tax,
Toll Tax, Local Area Development Tax, Agricultural Market Fees, Toll Tax
and so on.
•
In order to remove the distortions and complexities arising out
of the local level taxes, all such levies must be subsumed to GST.
As far as funds for local bodies are concerned, a part of the GST
collection could be earmarked for this purpose. This would also
be in line with the recommendation made by the Task Force on
GST of the 13th Finance Commission.
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P. ICDS problems like prudence, inventory
valuation for investment cos., expected profits
inclusion similar to expected losses, etc.
•
The most of the items in ICDS are timing issues & as such typically
would get even out in a business cycle. Therefore, on a business cycle
basis there is little risk of any revenue loss. On the other hand ICDS
run virtually parallel to the accounting standards which themselves
are getting transformed into new accounting standards (Ind-AS).
•
Even though it is clarified that separate books of Accounts are not
required to be maintained for ICDS, it is an additional burden to
maintain memorandum information year after year to align the
competition of taxable income with ICDS.
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Q. Restriction on carry forward of losses under
section 79 of the IT Act for start ups
•
The extant provisions of section 79 of the Income-tax Act, 1961
(“IT Act”) restrict closely held companies from carrying forward and
setting off losses in case shareholding varies by 51percent or more in
the year in which the loss is considered to be set off vis-a-vis the year
in which the loss is incurred . The bonafide commercial transaction
like change in shareholding pattern in a Digital Start-up Eco-system
due to funding or acquisition for inorganic growth suffers by being
denied such carry forward and is a huge set back.
Suggestion:
•
Allow 8 year time period for set off of losses to the Start-up legal
entity which is separate from the Shareholders
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Q. Restriction on carry forward of losses under
section 79 of the IT Act for start ups (Contd.....)
•
Issue Clarification circular that restriction prescribed u/s 79 of
Income tax should not apply to Start up Ecosystem where change in
shareholding pattern is due to infusion of funding by Investors
without change in the management of the company run by original
founders
•
Rigours of section 79 of the IT Act should be restricted only in
cases where the change in shareholding is effected with a view to
avoid or reduce tax liability by way of a restructuring exercise
•
A timely clarification to resolve this anomaly for the benefit of
entire start-up ecosystem will help in promoting research and
innovation in new areas, creating business and start-up culture
which will lead in employment generation for millennial generation
and making Digital India dream come true.
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R. “Smart City” project/ concept of the Hon'ble
Prime Minister
The following tax suggestions would help make the programs attract
investment:
•
Tax Holiday for 15 years;
•
Investment linked tax incentives;
•
Will provide certainty and stability to the investor due to long
gestation
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S. “Make in India” dream of Hon'ble Prime
Minister
Suggestions:
•
Tax Holiday for specific period;
•
Investment linked tax incentives;
•
Special Industrial Clusters to be created;
•
Benefit of existing Section 32AC (deduction of investment
allowance available to only plant & machinery) should be extended
to total Capital investments
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Thank you
The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office:
5, Sardar Patel Marg, Chanakyapuri, New Delhi 110 021, INDIA
Tel : 011-46550555 (Hunting Line) ● Fax : 011- 23017008/9
E-mail: assocham@nic.com; finance@assocham.com ·
Website: www.assocham.org
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