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Tax Policy Papers
Deloitte’s tax policy group brings together the knowledge and experience of Deloitte tax professionals and subject matter experts around the country in the critical area of Indian tax policy.
Deloitte India has released the following policy papers. Click on each paper to explore in detail.
Tax deduction and collection at source: Easing compliances in India
India has an extensive withholding tax regime under its income tax law. This covers TDS when businesses make certain categories of payments (both domestic and foreign) and TCS when they make certain categories of sales. A wide range of transactions are subject to TDS/TCS, which the tax deductor/ collector has to deposit in the government account. Vendors and buyers whose payments and sales are subjected to TDS/TCS, can later claim credit for these taxes when computing the final tax liability on their own income.
The purpose of this paper is to outline the compliance burden on taxpayers owing to the extensive withholding tax regime on domestic non-salary payments and sales and to suggest alternatives to ease it. The suggestions are based on the premise that most taxpayers are compliant, specially if they are aware that their business transactions are being reported to the tax authorities by third parties so that TDS/TCS regime need to apply to only those transactions that are not being reported.
Reducing income tax disputes in India - A way forward
The income tax dispute resolution mechanism in India is multilayered and time consuming, affecting the environment for doing business in India. The country has an extensive tax appeals system that goes up to the Supreme Court of India.
However, this system is subject to overuse. The income tax department is a major generator of tax appeals filed under the current dispute resolution procedure. Compared with other countries, India’s tax litigation numbers, pendency, and resolution times are significantly higher. India’s income tax department has a very low rate of success in its tax appeals compared with other countries. To address this issue, one of the measures the government has proposed is a direct tax dispute resolution scheme for pending tax appeal cases through a legislation, 'The Direct Tax Vivad se Vishwas Bill 2020' introduced in Parliament. 'Vivad se Vishwas' translates to 'From Dispute to Trust'. In order to improve the current proposal in the Bill (which treats taxpayer and departmental appeals on the same footing for payment of disputed taxes), this paper suggests a graded system of taxes to be paid by the taxpayer in case of departmental appeals. A suggestion to reduce tax disputes in the future is to grant only the taxpayer (instead of both the taxpayer and the tax administration) the statutory right to file an appeal to a tax tribunal. This would be a step towards the government’s stated objective to build greater trust with taxpayers.
Advance rulings in India: Delivering greater tax certainty
Countries recognise that while extensively cooperating on international tax issues to address the challenge of tax base erosion and profit shifting, providing tax certainty to business is important for promoting their investment and trade. This paper examines how a robust advance ruling regime can significantly promote tax certainty.
A private advance ruling on the tax implications of a proposed transaction is useful for multinational enterprises, as it resolve complex interface between domestic tax laws and tax treaties for cross-border transactions. In 1993, post the opening of the Indian economy in 1991, India introduced the scheme of advance rulings. Advance rulings in India are delivered by a distinct quasi-judicial tribunal, Authority for Advance Rulings (AAR).
In the initial years, with timely and noteworthy decision making, the functioning of the authority addressed the needs of the taxpayers. The AAR issues advance rulings on applications by taxpayers within six months.
This paper analyses the factors causing AAR a delay in issuing timely rulings in recent years. It also suggests measures to remedy the situation so that India can offer an efficient advance ruling mechanism to promote the ease of doing business.
Authority for advance rulings in indirect taxes: An analysis and alternative approach
This paper discusses the evolution of the advance ruling mechanism in India, attempts a critical analysis of its functioning and, in the light of the experience gained, explores measures that could enhance its effectiveness.
This white paper draws on Deloitte’s extensive international knowledge, experience of the Authority for Advance Rulings (AAR), and best practices in the operation of such arrangements. It also analyses the present working of the AAR in India. We trust that the recommendations provided in this white paper will be useful for you and tax authorities for making the AAR scheme more effective for taxpayers.
The Minimum Alternate Tax (MAT) on Companies: Challenges and Way Forward
The Alternative Minimum Tax (AMT) is a provision introduced in direct tax laws to limit the tax deductions/exemptions otherwise available to taxpayers so that they pay a “minimum” amount of tax to the government. Globally, India is one of the few major countries that retains an AMT in its direct tax law. In India, when applied to companies, AMT is termed the Minimum Alternate Tax (MAT), operating with a “MAT credit” carry forward mechanism.
This allows a company to carry forward the “excess” tax it pays because of MAT (as against its regular tax liability) in a particular year, to be utilised in a future year as a credit against its regular tax liability. However, the increase in MAT rates over the years has made it extremely difficult for companies to avail their “MAT credit,” even though the carry forward period of credit has been allowed up to 15 years.
Complexity in computing the “book profit” under MAT provisions and recent changes in accounting standards have further increased the tax compliance burden for companies. Easing the “MAT credit” mechanism and simplifying the MAT computation provisions (on the lines suggested in this paper) would help rationalise MAT and assist companies in the ease of doing business in India.
Indian Advance Pricing Agreement Programme: Evaluation and Way Forward
The Indian government introduced the Advance Pricing Agreement (APA) programme about six years ago with the objective to provide much needed tax certainty to multinational enterprises (MNEs) operating in India, particularly on their intra-group transactions, and in the process, adopt global best practices. Six years down the line, the programme has attracted considerable popularity with foreign investors as indicated by the fact that nearly 1,000 APA applications have been filed and close to 240 APAs signed.
Credibility of a tax administration depends to a large extent upon the efficacy of its dispute resolution mechanism. Dispute prevention has an equally important role in dispute management. In ensuring that avoidable disputes do not occur, APAs have stood out as a model for dispute prevention. Initially the APA programme did not have roll back provisions, but they were added to the programme after tax authorities realized the overall benefit.
All these changes have made the APA programme very popular and successful. But as it happens in any programme, the APA model needs to evaluate itself and recalibrate appropriately. This tax policy paper, second in line for 2018, is an attempt to evaluate and provide the way forward with an objective to improve and bring robustness to the APA programme. The paper provides more than 22 recommendations, covering procedural aspects of the APAs, post-compliance procedure of APAs, and also on legal and other aspects.
Hope the paper brings some important takeaways for tax policy group and taxpayers, and helps in taking a step further to improve the ‘Ease of Doing Business’ - by providing further tax certainty.
Tax Incentives for Savings: Adjusting for changes in work-life
Employment trends indicate that during their working life, individuals will increasingly have multiple jobs interspersed with periods of selfemployment and voluntary or involuntary separation from the job market. Life expectancy beyond working life is also on the rise in India. So the goal of public policy should be to promote tax-sheltered savings instruments that are flexibly tailored to the new working life and to take care of life after retirement. The major financial instruments available in India for such long-term savings are the Employees Provident Fund (EPF) for employees in the non-government, formal sector. For government employees, it is the National Pension Scheme (NPS) Tier I Account.
Both schemes envisage contributions from employer and employee and have significant tax incentives attached to them. However, these schemes (and the associated tax incentives) do not fully address the savings needs of individuals who are self-employed or who may be temporarily out of the workforce.
The National Pension Scheme (NPS) Tier II account run by the Pension Fund Regulatory and Development Authority (PFRDA) under a statutory law along with its attendant ecosystem of a single identifier and cross-country service providers, could be an ideal instrument for long-term savings for all individuals specially those who may not be part of the organized workforce. We suggest a Tax Exempt Exempt (TEE) mode with modified withdrawal norms for a revamped NPS Modified Tier II Account which would help address the savings profile of the workforce of the 21st century.