Tax Reforms – Opportunities and Challenges

CII – CFO conference7th November 2014

R.KannanHinduja Group

Views expressed are personal

Trends

• Economic Underperformance of countries across the world.

• Underperformance of Companies around the world.

• Pressure on mobilisation of resources by Governments and Corporates.

• The solutions for overcoming the crisis in the short term are still not visible and the ones adopted by Governments and central banks are not yielding the desired results.

Trends - contd Balance sheets of Countries /banks /corporates

are still under stress. Regulators around the world are looking for

innovative methods for mobilising resources and identified direct tax is one of the sources for shoring up their finances.

Authorities across the world are strengthening the monitoring systems to capture transactions where the profit shifting takes place and putting in systems to levy tax on profits relevant to the domestic operations.

Challenges for corporates Corporates are already under stress. A performance of a corporate today is more influenced by

developments in the environment and a robust internal operation does not guarantee a profitable operation.

The new measures by government across the world is making the tax planning exercise futile.

The decision rules followed by authorities are introducing uncertainty .

The tax arbitrage available to make a business more competitive is diminishing.

The compliance requirements are becoming very stringent and the knowledge about the new developments in taxation aspects have to be updated on a continuous basis.

The new regulatory developments are challenging the robustness of present business models and not guarantee a profitable operation.

Even established principles of taxation are being challenged by regulatory action and new rules which have a retrospective effect.

Opportunities for Corporates The new developments force corproates to

review their present business models and transform to sustainable , new , innovative business models.

Corporates are forced to adopt best Corporate governance practices which leads to a professional management of an enterprise.

Develop a business based on fundamental principles not based on tax arbitrage.

Focus on Compliance aspects and develop robust systems and procedures for management of the enterprise.

Tax Morality It has been proven by research that profits

earned from tax paid transactions earn higher returns on the capital.

Investments incurred for saving tax result in much lower productivity.

Evasion of tax by a few has put pressure on genuine transactions.

There is a wide tax evasion in the informal and SME sector which leads to lower tax base .

This puts a heavy burden on those who pay tax resulting in higher level of scrutiny and additional pressure on corporates.

BEPS / GAAR• There is a BEPS action plan to curb tax avoidance world wide.• Standards were published for automatic exchange of information.• There is expansive reporting requirements.• Most of the countries have started reviewing the operations of

companies to ascertain the profits relating to home country operations and want to tax them irrespective of where the registered , head quarters of the country is located.

• Now countries are unilaterally applying GAAR and overriding tax treaties.

• The countries which are losing court cases in GAAR related issues are making the laws more stringent.

GAAR in India The initial version has been diluted. It has introduced tax uncertainty in the Indian

environment. It is likely to impact existing investment and

operating structures for companies. This will override all tax treaties and the business

models created based on such treaties will be tested. There is a wider power given to the authorities. There is no provision for providing relief to the

counter party. Like to lead to lot of litigations. The companies will be forced to adopt structures

which maximises the tax paid to be out of the ambit of GAAR.

GST This is likely to widen the tax base. Exclusion of Liquor and Land will lead to higher rates

of taxation. This will significantly increase the tax collections

across India. Will lead to good audit trail, reduce revenue leakages

and reduce tax evasion. It will provide a good mechanism of cross verification

of transactions. Introduction of GST will be good for the enterprises

in the organised sector. The challenges will be to find a suitable system and

formula to ensure that the states will also benefit from the new system.

Dispute Resolution Number of disputes are going up. There is a huge shortage of infrastructure and personnel in

government to resolve issues expeditiously. Number of cases pending before CIT ( A ) at the end of FY 12 –

231,000 cases with a value of Rs.244,000 cr. There are alternate channels available for dispute resolution but

they do not have the same effect as the ones resolved by official channels.

APA mechanism is good one but so far only few cases were cleared and after May, the speed of clearances had come down.

The pace of new appeals is going up very fast . Recent notable cases were relating to Transfer price, indirect

transfer of shares, mandatory income, closing provisions, payments for tax withholding, Gift of shares and Royalty payments.

Time taken by Appellate levels

• Supreme court – upto 8 years.• High court – 5 years• ITAT – 3 years.• CIT – 4 years.• AO – 1 to 2 years.

Way forward Government authorities had come across all

types of transactions for scrutiny. Based on the experience, identify 100 typical

transactions , create flow charts for tax impact on such transactions and the method for complying with such provisions.

Progressively reduce the tax rates . Adopting the above models should not attract

any further scrutiny at a later stage. Share with all the tax authorities and

Corporates the models which could be a good guide for tax planning. This will help in better business and tax planning.

Way forward Investors invest in projects , new businesses based on

regulatory , tax , economic and other arbitrages which is one of the main motivation for investment in new projects.

Removing the tax arbitrages will slow down investments. Before implementing new provisions, the likely impact on removal of arbitrage on capital investments and growth of industry should be assessed.

Focus more on widening the tax base than levying higher taxes on the existing entities.

Adopt global best practices . While using bench marks, it has to be recognised that in

an industry there are Leaders, followers and Laggards and each has a different cost structure and Profit ratio. This fact has to be recognised while looking at TP.

Way forward for corproates Give a very high focus on compliance. Create a separate department for compliance. Closely monitor the development in regulatory space and

constantly update the knowledge base. Develop immediate response to comply with the new

regulations. Work very closely with the Regulatory authorities to explain

the recent developments in the business models and how these have implications for business competiveness and profitability.

In Many instances, the disputes arise due to poor understanding of business models.

Thank you