Guest Blog: Taxes to bring uncertainty in business environment

On 16th March, 2012 Finance Minister presented the annual Budget relevant for the 2012-13. Out of many important tax proposals introduced on Direct and Indirect Tax, some contentious changes in the budget will affect the corporate sector that may bring more uncertainty in the business environment.

 

 

Increasing or decreasing of Tax rate is one aspect since it is a cost for an entrepreneur or an industry to account for. But uncertainty of taxation is a cost which is beyond measurement. Therefore, it affects the entrepreneur, industry and people dependent on the industry. Significant changes in this Budget are as under:

 

First of all let us talk about the impacting international taxation and cross border taxation. This amendment has been proposed effective from April 1, 1962. It empowers the Assessing Officer to open the transaction of cross border, sale of directly or indirectly ownership control for the assets located in India. This amendment will re open all the cases which has been settled by different Judicial Authorities including the Supreme Court.

 

Recent example is the Vodafone case where the tax authority is getting opportunity to tax. This will once again re-start battle ab initio. This uncertainty will scare and frighten any investor who wishes to invest in our country by acquisition or by creating an asset in India.

 

Secondly, let us think about several retrospective amendments proposed – overriding various judgements. Many other similar transactions such as licence of software, leasing of machinery on lease, payment for connectivity charges, all have been taken as retrospective from 01.06.1976.

 

Thirdly, I would like to mention the introduction of General Anti Avoidance Rule (GAAR) provision. It is unfortunate to expect from the industry to understand GAAR at this stage whereas knowledge of GAAR within the department itself is in the process to be acquired.

 

The power given in the hands of Assessing Officer to invoke GAAR is disproportionate to the offence which an assessee may commit due to ignorance or uncertainty of the law. We should not forget that in India corporate structure evolution is a recent phenomenon of last 10 years. Therefore, every group is forced to operate in multiple company names and multiple entities. In these circumstances applicability of GAAR will comes as common feature with almost every case of every corporate house having a turnover of more than 25 crores Rupees or so.

 

Lastly, I would like to throw some light on the inclusion of specified domestic transaction in Transfer Pricing regime. It is easy to understand the wish of lawmakers to tax evaders. But it is impossible to understand about punishment to tax units, companies operating in the tax incentive zones which the Government has provided in order to promote industry.

 

In this budget such promotion given by the Ministry of Industry, Ministry of Commerce and State Governments all have been put to test the wisdom of Assessing Officer of 5 to 6 years of experience to understand complex structures of industry and its rational of operation from different part of India.

 

The author isDirector of Smartchip Limited.