Meeting with Revenue Secretary on

NEW AND INNOVATIVE TAX POLICIES IDEAS

Tuesday, 6 October 2015

DIRECT TAXES

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Content

A.Tax Administration - Shome Committee recommendations

B.Corporate tax measures…

C.Transfer Pricing measures

D.Expatriates taxation – eliminate through “co-operative compliance”

E.Rates of TDS on Royalty and Fees For Technical Services (‘FTS’)

F.Taxation of consortium for setting up manufacturing plants

G.Single tax regime  for  small  manufacturing businesses

H.Duty on SEZ clearance

I.Creating 15 Billion Man-days of Employment and Reducing Current Account Deficit by promoting Wood based Industry

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J.“Make in India” : Encouraging Innovation to deliver Corporate Initiatives for larger Societal Value Creation

K.Incentivising world class Indian Brands – Job Creation and Retention of Value in the Country

L.Exclusion from eligible R&D expenses

M.Incentivising R & D expenditure for promoting “Make in India” manufacturing

N.Creating large-scale Employment and Managing Food Inflation through a thrust on Food Processing Industry

O.Removal of Tax Distortions

P.ICDS

Q.Restriction on carry forward of losses under section 79 of the IT Act for start ups

R.“Smart City” project/ concept of the Hon'ble Prime Minister

S.“Make in India” dream of Hon'ble Prime Minister

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A. Tax Administration - Shome Committee recommendations

1. Treat each Taxpayer as a customer of the Tax Department. Make adversarial approach between taxpayer and department a thing of the past.

2. Strengthen customer focus on taxpayer services and taxpayer experience by prioritising the following administrative reforms:

Merger of CBDT and CBEC into a single Central Board of Revenue Separate administrative functions from law-making. Adopt tax revenue gap analysis and bottom-up approach for fixing

revenue targets by region having regard to econometric modelling. Conduct impact assessment studies of various tax policy measures Conduct industry sector wise research-based analysis of policy

considering trade flow trends. Tax department should not challenge tax payers choice of forum

whatever it is availing Advance Ruling, Settlement Commission etc.

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B. Corporate tax measures…

1. Accelerate announced reduction of overall corporate tax rate to 25% - it could result in boosting foreign investment and growth

2. Withdraw ICDS or defer by a few years, since they conflict with mandatory AS

3. Guidelines/ Circulars and other subordinate legislation should as a rule be made available for public comment reasonably ahead of provisions in the Act are introduced/ amended with likely impact on industry sector over say five years.

4. Simplify TDS systems by calibrating rates for various TDS provisions so that refunds are minimized.

5. Index threshold limits to Cost Inflation Index in TDS and other provisions.

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Corporate tax measures (contd…)

6. Introduce provision to exempt applicability of TDS to profitable Indian companies, and allow them to pay higher advance tax to make up for TDS they would otherwise have collected. This will reduce complexity and cost in determining and accounting for TDS, filing returns, and issuing certificates. Law relating to deferring the refund in scrutiny cases should not be applied where refunds arise due to TDS.

7. Tax filing compliance of Expatriates to be allowed by employer companies.

8. This is a form of “co-operative compliance” – a new paradigm that aims to reduce compliance cost and effort, without revenue sacrifice.

9. Simplify Rule 8D to be a percentage of exempt income if there is an expense incurred on such activity; this will increase certainty and reduce tax disputes 6

Corporate tax measures (contd…)

10. POEM guidelines should – Avoid situations where both countries may claim worldwide taxation

rights over a company’s income

Not to be made applicable to operating companies

Government should be prepared to have Indian subsidiaries claiming to have POEM in a foreign jurisdiction to avoid being taxed in India

Underlying tax credit should be allowed.

11. Tax provisions for, and definitions of terms used in, international taxation should be brought in line with international understanding thereof – POEM, international transaction, royalty, inter-quartile range, multiple year data, etc.

12. Cash economy should be curtailed by incentivising use of credit/debit cards.

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13. To simplify taxation on businesses all computational  / incentives provisions  be eliminated and calibrated, minimum alternate tax rate may be prescribed initially for all tax payers who are required to maintain accounts and to  get them audited for tax audit purpose.

14. To make acquisition overseas by Indian companies competitive  underlying tax credit should be allowed to the investor company against income received from such investments.

15. Re look at tax policy on expanding source rules based taxation on  services activities as India in future may not be exporter of services.

16. To reduce litigation statement of intent of tax provisions be issued by  revenue giving a clear position on application of  law under typically encountered situations  which if not followed may require mandatory disclosure.

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C. Transfer Pricing measures

1. Domestic transfer pricing should not apply to transactions by Indian companies with other domestic related parties, both of which are profitable; there are no adverse tax implications in such cases

2. The safe harbour cut-offs are currently excessively high; they should be revised downwards to effectively allow tax payers to avail of these.

3. Safe harbour and rollback provisions should be made more reasonable to encourage more companies adopt them having regard to business dynamics.

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D. Expatriates taxation – eliminate through “co-operative compliance”

1. If “Make in India” gathers steam, there will be many more expats coming into India on short to medium term assignments. Eliminating tax compliances altogether in India for them would go a long way in allaying their reservations in coming to India. They should have hassle-free entry into and exit from India, no PAN requirement, and no need to file tax returns.

2. Employer-companies should agree to pay (based on their payroll records) the tax due on salary paid to expatriate employees while in India, in a simple effective way.

3. There will be some complexity in determining whether there is a PE or not, etc. which can be provided for.

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D. Expatriates taxation – eliminate (contd…)

4. Adoption of “cooperative compliance” movement such as the above will Reduce tax department’s time and allow them to concentrate

resources on high-risk taxpayers.

Remove most current compliances – and that can yield significant cost savings

Free expatriates on short term to medium term assignments from all tax compliances, which currently discourages to step into India

Greater certainty relating to tax compliances

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E. Rates of TDS on Royalty and Fees For Technical Services (‘FTS’)

With effect from 1st April 2013, TDS on royalty and fees for technical services (‘FTS’) payable to non-residents was subjected to higher income tax @ 25%  of gross amount. This year Finance Act restored the 10% rate.

However 20% rate of TDS comes into play when the supplier of technology does not have a tax registration in India (PAN). Such high withholding tax assume a profitability of over 50% which is unreal in today’s competitive world and as such the supplier is unable to  claim credit in home country and invariably passes on the burden of taxes to the Indian manufacturer thus making  the manufacturing expensive in India.

Accordingly, it is suggested that tax rate restored by the Finance Act 2015 to 10% be made applicable irrespective of PAN requirement. In the alternative, certified copy of home country tax registration may be considered sufficient in place of PAN.

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F. Taxation of consortium for setting up manufacturing plants

Many large projects are undertaken by consortiums, where  equipment supply is performed by one  of  the members of the consortium.  These offshore supplies are not taxable as per the verdict of the Apex Court.  However, in the in recent past, it has been  that such supplies are now sought to be taxed by the tax department by treating the consortium as an Association of Persons (AOP), resident in India. This is being done even if there is no profit / loss or risk sharing between the members and each member undertakes its portion of job at itys own cost & risk.  It is desirable that law should be amended to provide that only such consortiums should be treated an AOP where the profit sharing happens among the members.

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G. Single tax regime  for  small  manufacturing businesses

For small businesses (doing value addition upto say 25 crores), one lumpsum tax should be   worked out  which  should satisfy need of payment  of all  taxes by  such businesses.  At the back end such tax collected may be  apportioned / distributed as needed.  The process of collecting such taxes should be simple and  safe harbour rates for the same be prescribed  based on  the expected total tax contribution (TTC) by class of businesses in a Industry.

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H. Duty on SEZ clearance

While SEZ policy was brought out to boost domestic manufacturing in a hassle free way, the tax benefits have been substantially vittled down, which is not encouraging manufacturing activity at all in SEZs. To encourage India to be made a global manufacturing hub for various items, particularly automobile cars, a domestic sale component is necessary, but the high customs duty levied on domestic sales is a big deterrent. This custom duty gets levied at a rate higher than lower FTA rates on certain items and gets levied even on value added in India i.e., Indian labour, Indian material etc.

It is suggested that customs duty be levied on DUTY FOREGONE BASIS on domestic sales from SEZ’s. Further, to keep distinction between SEZ manufacturers and domestic manufacturers a SURCHARGE may also be levied on SEZ manufacturers undertaking domestic sales so as to counter the duty benefits availed by SEZ on imported capital goods.

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I. Creating 15 Billion Man-days of Employment and Reducing Current Account Deficit by promoting Wood based Industry

• India imports US$ 5 billion worth wood and wood-based products such as furniture,construction timber, pulp & paper, packaging, plywood etc., largely from ASEAN countries due to very low import duty ranging from nil to 5%.

• The current tariff policy, which makes imported wood more attractive than growing trees in India, prevents livelihood creation in the country and “exports” the jobs to countries selling these products, simultaneously putting pressure on the current account balance.

• Agro-forestry provides innovative solutions to address food and wood security by synergising tree growing with crop production optimizing land-use.

• Given the multiple benefits of agro-forestry in creating employment, enabling environmental replenishment, and new economic opportunities particularly in rural India, policies must support the development of this sector.

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It is recommended that:

• Import duties be raised to 10 % for wood and wood-based products.

• Extend agro-forestry all the benefits available to agriculture including unrestricted movement of such produce and long term institutional credits.

• R & D for the evolution of improved wood species should be extended aweighted deduction of 200 % of expenses for income tax purposes. Tax benefits and incentives are also required to locate industry near such plantations in rural India.

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J. “Make in India” : Encouraging Innovation to deliver Corporate Initiatives for larger Societal Value Creation

• In line with the Hon’ble Prime Minister’s call for qualitative and sustainable industrial growth in the form of “Make in India : Zero Defect and Zero Effect”, there is a strong need to encourage and incentivise the immense transformational capacity of corporates in innovating business models that can synergistically deliver economic and social value simultaneously.

• Sustainability in Business Development in its truest sense can only take place when economic growth fosters social equity.Growth must translate into the creation of sustainable livelihoods and replenishment of scarce environmental resources. Limits to future growth will be defined more by vulnerabilities flowing from social inequities, environmental degradation, and climate change than by any other economic factor.

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• Government can support the development of a Responsible Business “Trustmark” Rating System that could be used to convey to the consumer a company’s environmental and social performance. An enterprise could be awarded credits by way of “Trustmark Rating”, based on an objective evaluation of its triple bottom line performance. An accumulation of such credits could earn the enterprise Trustmark Ratings on a progressive scale. These Ratings could then be displayed on products and services of the company to help consumers make an informed choice.

• Government must consider the provision of a differentiated and preferential set of incentives, fiscal or financial, to companies that demonstrate leadership in sustainability performance.Companies with high “Trustmark” ratings should be provided with incentives like priority fast track clearances, purchase preferences, lower levies of central excise duty for manufacture of “green”, eco-friendly products and so on. This would spur powerful market drivers that will incentivise innovation for larger triple bottom line impact.

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•Banks and Financial Institutions could also factor in the Trustmark Ratings in their lending operations providing benefits to more responsible corporations. Going forward, it may even be possible to trade in these “Trustmarks”, if a system similar to carbon credits or energy efficiency certificates can be developed so that organisations with surplus credits are able to monetise their efforts.

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K. Incentivising world class Indian Brands – Job Creation and Retention of Value in the Country

• Most of the high-end consumption spends by the affluent and middle-class is captured by foreign brands that dominate every segment of the Indian global market.

• Many of these foreign brands tend to import either the finished products or major components rather than manufacturing them in India. This has resulted in jobless consumption growth in India.

• Indian entities that create employment opportunities and generate value that is retained within the country must be supported for the development of world-class brands.

• These Indian entities deserve fiscal incentives since brand-building entails large investments over a considerably long period of time. There is need to create National Champions who will build Indian brands for India to be internationally competitive through ownership of world-class intellectual property. This is eminently possible as has been demonstrated by countries like Japan & South Korea who were also in a similar situation. Now they have several world-class global brands.

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•It is recommended that Instead of providing weighted tax deduction on R & D expenditure which is merely based on inputs without any linkage to outcomes in the form of consumer franchise, the incentives should be linked to revenue generated through the sale of branded products. For example, a percentage of sales of the Indian brands should be the basis for crafting the incentive. (For this purpose any brand owned by a registered entity in India, whether owned by foreign or Indian capital, is an Indian brand.)

•In the long-run, India can become a sustainable hub of global manufacturing only by the creation and ownership of world-class intellectual capital.

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L. Exclusion from eligible R&D expenses

•The eligible R&D expenses are entitled to weighted deduction.  It is seen that the small and mid sized companies which need R&D at a grass root level are unable to support full fledged end to end R&D facility in-house.  In such cases they engage outside agencies to undertake certain functions required for such R&D.  Presently the expenses incurred on sourcing such functions are excluded from  being eligible for weighted deduction.  This results in denial of weighted deduction to them.  It is recommended that the exclusion of expenses incurred from  eligible R&D expenses should not be made as in today's world there are specialised agencies who undertake such functions and  it make sense to engage them.

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M. Incentivising R & D expenditure for promoting “Make in India” manufacturing

• The Income Tax Law currently provides for tax benefits in respect of scientific research expenditure. However, there are a number of constraints in availing such incentives. For example :

• As per section 35(2AB), the benefit is not available for articles specified in the eleventh schedule. This is highly discriminatory the in-house research and development is not incentivised for all items. In fact, the absence of quality in-house R & D significant expenses are incurred in respect of royalty payments for use of imported technology, packaging / technical specifications etc. Another direct fall out is the menace of contraband products.

• The DSIR Guidelines has restricted the availability of the deduction. This restriction should be corrected by including specific expenses like expenditure on outsourced R & D, foreign consultancy, clinical trial etc.

• The DSIR Guidelines are excessively restrictive. For instance, it specifically states that to lodge a weighted claim the manufacturer should enter into an agreement with DSIR for co-operation in such R & D. This provision should be removed. Also, the guidelines state that the assets acquired and products emanating out of R & D shall not be disposed off without approval of DSIR. 24

N. Creating large-scale Employment and Managing Food Inflation through a thrust on Food Processing Industry

• Spur demand growth in the Processed Food sector through a tax free regime. Stay with this for long enough for results to manifest in large scale employment and reduced food inflation.

• Higher demand will attract investment in food processing and cold chains raising share of processing from 2% to 40% in line with countries like Malaysia and Thailand.

• The Food Processing sector value-chain has potential to create over 9 million jobs, 60 % of which will be in rural areas. These jobs will largely be in Small and Medium scale enterprises contributing to regionally balanced employment through the development of local supply chains as well as the agri-services sector.

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•Large-scale Food Processing will reduce agri-wastages, enhance availability of food and bring down prices further whilst increasing farm incomes.

•Integrate local, regional and national markets seamlessly by bringing down artificial inter-state barriers. This will support Prime Minister’s vision of a National Agricultural Market by extending it to a National Agriculture and Food Market.

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O. Removal of Tax Distortions

• The variety of taxes prevalent in the country – across the Centre, States and Local Bodies – and their considerable differences across States and Local Areas results in high compliance cost for industry and balkanisation of the national market. This impedes the ability of industry to achieve economies of scale.

• The Goods and Services Tax (GST) will bring about transformational change by way of unifying the national market, widening the tax base and lowering the cost and complexity of taxes. However, GST will not address the distortions that are created by local levies like Octroi, Local Body Tax, Toll Tax, Local Area Development Tax, Agricultural Market Fees, Toll Tax and so on.

• In order to remove the distortions and complexities arising out of the local level taxes, all such levies must be subsumed to GST. As far as funds for local bodies are concerned, a part of the GST collection could be earmarked for this purpose. This would also be in line with the recommendation made by the Task Force on GST of the 13th Finance Commission.

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P. ICDS problems like prudence, inventory valuation for investment cos., expected profits inclusion similar to expected losses, etc.

•The most of the items in ICDS are timing issues & as such typically would get even out in a business cycle. Therefore, on a business cycle basis there is little risk of any revenue loss. On the other hand ICDS run virtually parallel to the accounting standards which themselves are getting transformed into new accounting standards (Ind-AS).

•Even though it is clarified that separate books of Accounts are not required to be maintained for ICDS, it is an additional burden to maintain memorandum information year after year to align the competition of taxable income with ICDS.

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Q. Restriction on carry forward of losses under section 79 of the IT Act for start ups

• The extant provisions of section 79 of the Income-tax Act, 1961 (“IT Act”) restrict closely held companies from carrying forward and setting off losses in case shareholding varies by 51percent or more in the year in which the loss is considered to be set off vis-a-vis the year in which the loss is incurred . The bonafide commercial transaction like change in shareholding pattern in a Digital Start-up Eco-system due to funding or acquisition for inorganic growth suffers by being denied such carry forward and is a huge set back.

Suggestion:

•Allow 8 year time period for set off of losses to the Start-up legal entity which is separate from the Shareholders

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Q. Restriction on carry forward of losses under section 79 of the IT Act for start ups (Contd.....)

•Issue Clarification circular that restriction prescribed u/s 79 of Income tax should not apply to Start up Ecosystem where change in shareholding pattern is due to infusion of funding by Investors without change in the management of the company run by original founders

•Rigours of section 79 of the IT Act should be restricted only in cases where the change in shareholding is effected with a view to avoid or reduce tax liability by way of a restructuring exercise

•A timely clarification to resolve this anomaly for the benefit of entire start-up ecosystem will help in promoting research and innovation in new areas, creating business and start-up culture which will lead in employment generation for millennial generation and making Digital India dream come true.

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R. “Smart City” project/ concept of the Hon'ble Prime Minister

The following tax suggestions would help make the programs attract investment:

•Tax Holiday for 15 years;

•Investment linked tax incentives;

•Will provide certainty and stability  to the investor due to long gestation

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S. “Make in India” dream of Hon'ble Prime Minister

Suggestions:

•Tax Holiday for specific period;

•Investment linked tax incentives;

•Special Industrial Clusters to be created;

•Benefit of existing Section 32AC (deduction of investment allowance available to only plant & machinery) should be extended to total Capital investments

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Thank you

The Associated Chambers of Commerce and Industry of IndiaASSOCHAM Corporate Office:

5, Sardar Patel Marg, Chanakyapuri, New Delhi 110 021,  INDIATel : 011-46550555 (Hunting Line)  ●  Fax : 011- 23017008/9

E-mail: assocham@nic.com; finance@assocham.com    ·  Website: www.assocham.org

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