The G20, which is clear that tax evaders deserve no refuge, is now batting for tax certainty to foster entrepreneurship, investment and growth.

A subtle shift in its otherwise dismal perception of businesses became evident when financial leaders, who met at the German resort town of Baden-Baden, endorsed a report on the subject in March. They also vowed to track the progress on tax certainty in 2018.

The group’s call for a predictable tax regime is well-timed, coming as it does when companies are grappling with a new set of global tax rules being adopted by governments, including India’s, to fight tax evasion. Global corporations worry that the new rules — to make them pay their share of taxes and do so in markets they make profits — will raise their tax outgo and compliance burden.

Finger on Tax Trigger

Will it give rise to tax terrorism, and drive investors away from investing in growing markets? These are concerns that governments must address.

The report on tax certainty prepared by the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD), based on a survey of many businesses, serves as a useful guide for India’s policymakers and tax administrators to shape a more certain tax environment.

The reason: the country has adopted a slew of new tax policies, such as the general anti-avoidance rules (Gaar), to curb sharp tax practices. A law to fight black money is in place. India has also reworked its tax treaty with Mauritius and has now agreed to ink a multilateral pact to modify many tax treaties to curb misuse.

Aligning domestic policy to global rules is in order. So is the move to create a Unique Legal Entity Identifier to make companies identify their real beneficial owners.

Soon, the Centre and the states will also roll out the goods and services tax (GST), the biggest indirect reform to create one market. Reforms are welcome. But the challenge is to implement them in a consistent way without fuelling more disputes.

Tax administrators must ensure a level playing field that eliminates harmful tax competition. It must address the genuine concerns of businesses as well, writes Akhilesh Ranjan, head of India’s International Tax Division, in his preface to ‘Information Exchange and Tax Transparency’ by his colleague Rahul Navin that argues for effective use of information sharing to fight tax avoidance.

Data shows that over six lakh appeals relating to the Centre’s direct and indirect tax were pending, with atotal disputed amount of about Rs 8.2 lakh crore, at the end of 2015. Understandably, policy think tank Niti Aayog worries over the rise in tax disputes, saying it leads to uncertainty both for taxpayers and the government.

Sensibly, it endorses reforms in tax administration — such as creating separate verticals for dispute resolution — recommended by the Shome panel.

Disputes have risen as India’s income-tax law has become cumbersome over the years. The dispute resolution mechanism, too, has some distance to go. Quasi-judicial bodies such as the authority for advance rulings, which allow investors to know their tax outgo ahead of a transaction, must be up and running. Surely, it cannot give rulings if, say, the chairman’s appointment is pending. That’s uncertainty for an investor.

The IMF/OECD report offers practical tips for governments to adapt to new tax policies: make tax laws simple, create a robust and time-bound dispute resolution mechanism, and have a predictable tax administration. India should blindly follow them.

Well-Stitched Gaar-ment

It would be comforting to investors, for example, if the government were to disclose its level of preparedness for the Gaar that entails tax officers collecting proper evidence before lifting the corporate veil to scrutinise any deal. Else, it will lead to unwarranted disputes.

Similarly, intensive training of tax officers is needed for handling GST as teething problems are inevitable during the rollout.

The RBI’s latest report on state finances has a concise analysis on ways to create an efficient common market. Rightly, it favours a simple GST design to avoid classification disputes.

Ideally, most products and services should attract the standard rate of 18%. RBI also underscores the need for timely dispute resolution, saying that’s a “prerequisite for the overall efficiency of tax administration and aconducive business environment”.

With multiple stakeholders, disagreements may arise at several levels: between the Centre and states, between states, and between taxpayers and tax authorities. The RBI suggests practical ways to minimise disputes.

It reckons that transparency in rules and procedures, easy availability of information and cooperation among stakeholders may help in preventing disputes. Outreach by tax authorities and guidance in filing returns will also help.

The legal infrastructure — a national appellate tribunal to adjudicate technical disputes relating to assessments, a settlement commission and the facility for advance ruling on GST dues — should be functional. What is the recourse if disputes cannot be resolved within the GST Council?

Not just the Centre, states also need to realise that certainty of the tax regime is a must for India to have an appeal as a place for doing business.

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Source: http://blogs.economictimes.indiatimes.com/Exchequer/challenges-in-super-reforms-like-gst-lies-in-its-implementation/

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