Budget 2015: FM should defer GAAR if he wants to revive investor sentiment

by Girish Vanvari

The government’s first full budget, which would be out in a few weeks from now, is expected to be highly reformist. There are a few aspects which stakeholders are looking forward to — Budget 2015 should provide clarity, stability and include incentive-oriented announcements. The government would have to strike the balance between such expectations and fiscal prudence.

The rule on taxability of offshore transactions resulting in an indirect transfer of assets in India is a debatable issue. There are a lot of questions such as what construes ’substantial’ and how should one compute the tax liability. The government should come out with detailed guidelines on the methodology to compute the tax liability in India in case of such indirect transfers.

The General Anti Avoidance Rules expected to be in force from April 2015 should be deferred for some time until the tax regime stabilises. The retrospective amendments introduced have dampened investment sentiments of many international investors.

The Finance Minister last year mentioned that there would be no more retrospective amendments. However, supplementing that statement with the removal of these retrospective amendments would help restore foreign investors’ confidence.

Vodafone case, a positive step

The government’s decision to not contest the Bombay High Court decision in the case of Vodafone and subsequently the Tax Department’s order directing its tax officers to follow this decision gives a positive signal that the government is serious on working on its promise to provide a clear and stable regime in India.

Numerous provisions in the tax law are subject to multiple interpretations made by the taxpayer and the tax department in different jurisdictions. The government should set up a panel that addresses specific industry issues and the same should be made enforceable across the country.

Increasing the scope and powers of the dispute resolution panel may be resorted to, to expedite the long litigated matters and close them in a timely manner. The capacity building of tax tribunals for a quick settlement of pending tax issues should also be actioned. Additional benches of the AAR can strengthen the infrastructure of the AAR and could result in speedy disposal of applications for advance rulings.

Revive investment cycle

One of the key focus areas for the government would be to revive the investment cycle. The ‘Make in India’ campaign initiated by the government would play an instrumental role in addressing many of the issues faced by the country today.

Success of the ‘Make in India’ initiative would depend on the ability to attract domestic and foreign investments into the sector. The government may consider incentivising innovation and R&D in the manufacturing sector considering its immense potential to increase competitiveness.

Creation of specific business zones by setting up of manufacturing hubs, industrial parks, more special economic zones, freight corridors, etc. should give a boost to the manufacturing sector. Policy reforms on the FDI front would encourage the much-needed foreign investments into the country.

There is an urgent need for development of infrastructure especially in the smaller cities. The government should provide for updating the key policies by making liberal laws giving tax and non-tax incentives. Giving such concessions such as a lower MAT could incentivise the sector.

Lower tax rates, enhanced tax breaks for investments in the infrastructure sector and measures to make available cheaper and efficient funding for the small and medium sector could facilitate the economic growth for the country.

(The author is head of tax, KPMG, in India. The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.)