Goods and services tax likely to be tabled in next budget session, India’s Revenue Secretary tells ICC

Mr Keijzer was speaking at a joint ICC India and Federation of Indian Chambers of Commerce and Industry (FICCI) roundtable on Indian Tax Policy and Administration. Organized by business for business the roundtable addressed a number of issues including international tax, tax treaties and India’s standpoint; tax administration in India and competitiveness of the Indian tax system; direct tax code; and GST on cross border trade.

Addressing 60 participants at the opening session of the day-long roundtable, Indian Union Revenue Secretary Sunil Mitra informed the gathering that the Indian Empowered Committee of State Finance Ministers will submit comments to the Union Finance Ministry today in relation to a revised draft of the Constitution Amendment Bill on the introduction of a Goods and Services Tax (GST). A meeting is set to take place in Goa on 1 April 2011 to discuss the revised bill that ensures fiscal autonomy to States by making the decisions of a proposed GST Council recommendatory and non-binding. The bill is expected to be tabled in the budget session of Parliament beginning February 2011.

Mr Mitra said that the proposed GST Council would take a view on the threshold of GST, the rates of tax, and the exemptions to be provided for. These would then be tabled in the legislatures of the States for approval.

Under the GST framework, taxes would be levied by States and the Union Government on manufacture and sale of goods and provision of services. This requires an amendment to the Constitution to allow the Union Government to tax goods and sale of goods, and States to tax services.

Mr Mitra said that the draft Direct Tax Code (DTC) Bill was being vetted by the Parliamentary Standing Committee on Finance. “We hope to get the Standing Committee’s comments by March 2011 and expect to get Parliamentary approval in the monsoon session. Thereafter the subordinate legislations relating to DTC would be framed and put in the public domain for comments from all stakeholders,” he said.

Anita Kapur, Director General of Income Tax (Administration), gave a presentation on the challenges for Indian Tax policy with India’s changing economic profile in the world economy, and the current financial and economic crisis. She said that India’s tax policy was driven by the need to provide a simple tax system with minimum exemptions and low rates designed to promote voluntary compliance. Such a system has to be transparent, fair and effective; improve tax revenues to meet developmental needs, and make the growth more inclusive.

Ms Kapur went on to state that exemptions should address market inefficiencies or generate positive externalities and said that there were converging priorities between India and other world economies to create a robust investment environment, which included; a supportive tax regime; reduced compliance and administrative burdens; enforced tax compliance – on shore and off shore; strengthened information exchange network; cooperation across borders and efforts to be part of global undertakings to counter tax evasion; recognition that tax evasion is linked to other harmful activities such as terrorism and drug trafficking, and corruption and counter treaty abuse.

Sushil Jiwarajka, President, ICC India and Chairman, FICCI Western Regional Council, noted that in order to sustain the growth process, India will need more investments and improved technology. This would require policy facilitation for investors. “We need to put in place an open and transparent tax regime for foreigners doing business in India and Indians doing business abroad,” he said.

Mr Jiwarajka said that to induce subsidiaries of Indian companies overseas to remit their dividends into India, it would be desirable for the Indian government to consider providing tax exemption/concessional treatment for such dividends or government may introduce the concept of the “underlying tax credit”, on the pattern adopted in other countries such as the Netherlands, Denmark, Belgium, Spain, Switzerland and Luxembourg.

Mr Jiwarajka said the Dividend Distribution Tax (DDT) is often a “sunk cost” for a foreign shareholder because DDT paid by the Indian company is not available as credit against the tax to be paid on such dividends in his home country. “We have to enable the foreign shareholder to be eligible for such credit. In this connection, my suggestion to the government is to have a “split” system, i.e. DDT for domestic shareholders and withholding tax (equivalent to DDT) for foreign shareholders, who would then be able to claim credit for the withholding tax paid by him in India. The suggestion would even be tax neutral from India’s perspective”.

Mr Jiwarajka also underlined the need for a mechanism of obtaining an advance ruling or the ‘clearance certificate’ for the taxpayer (similar to the present Authority for Advance Rulings – AAR mechanism) to determine specifically whether the Controlled Foreign Corporation regime applies to a particular fact pattern. This should also help in achieving the requisite certainty and boosting taxpayers’ confidence in the Indian tax system.

India’s taxing statute should also specifically exclude non-residents who do not have in India a place of business from complying with our withholding tax obligation. Currently, a non-resident is required to withhold tax irrespective of his having a business presence in India. This creates avoidable hardships to NRs who are not liable to be assessed in India, as they are only availing services from Indian residents. Such compliance cost in procuring services from India result in enhanced cost of Indian products and services, making these uncompetitive which ought to be avoided, he added.

The opening session of the day-long roundtable was also addressed by Mukesh Butani, Vice-Chairman, ICC Commission on Taxation and O.P. Vaish, Member, ICC Commission on Taxation and Member, FICCI Executive Committee.