"There will not be in future any retrospective taxation"
By Dipak Mondal May 25, 2016
Even as Vodafone and Cairn India tax disputes rear their heads again, forcing many to question the government's commitment towards making India's tax laws non-adversarial, Business Today's Dipak Mondal caught up with Revenue Secretary Hasmukh Adhia, and asked him about the many tax issues the country is facing. Excerpts:
Tax collection has been healthy last year (with a growth of 17.6 per cent), but that was partly because of 31 per cent growth in indirect tax collection. Do you think this year will see such high growth in indirect tax collection?
This year our (tax collection) projection itself is modest. We have a projection of 11 per cent growth in tax collection, which is very reasonable, unlike the projection last year which was 18 per cent.
The growth in direct tax collection is still in single digit (7.6 per cent). What are the steps being taken by the government to improve this?
Direct tax remains a challenge, but we hope that certain revenue mobilisation steps that we have taken, combined with the tightening of the reporting requirements, would result in a lot more people paying taxes. Therefore, we should be able to achieve the direct tax target, which is around 11 per cent more than the last year's target. We have introduced some new taxes - 10 per cent tax on dividend payments of more than Rs 10 lakh a year, a 6 per cent equalisation levy on digital advertising. Apart from this, there is this entire effort to widen the tax base.
For example, the number of returns filed in 2015/16 was more than 4.53 crore, which is a big jump (compared to 3.7 crore in the previous year). There are many people who pay taxes through TDS but do not file return. In 2014/15, there were 1.85 crore people who paid TDS but did not file return. We are trying to make them do it.
Any other steps being taken to widen the tax base?
We have something called non-filers monitoring system, and based on the information we receive from various sources, we check with the non-filers if the information we have gathered about them reflects in the return they have filed. Once we confront them with information, they automatically come back and admit their mistakes. These are some of the mild efforts of nudging people into filing returns and disclosing their income. The world is moving towards transparency. Nobody likes to be told that he is a defaulter and that he will face penalty or prosecution.
Another reason for (our) optimism (about being able to achieve this year's tax collection targets) is the dispute resolutions scheme. Assessees, whose cases are pending before the commissioner of appeal, can settle them by paying the principal and interest (up to the date of assessment). Any interest accumulated during the dispute period would be waived. A lot of people may come forward and pay their dues to settle the disputes, and we may get some additional money from this, though we have not accounted for this money in the current year's estimates.
Talking about equalisation levy, there is confusion about whether this is a direct tax or a service tax (indirect tax). Would you like to clarify?
Although people are viewing it as indirect tax, this is a direct tax. Our intention is that the person, who is giving advertisement to a foreign portal, is supposed to deduct 6 per cent out of the income that the other person is earning, and give it to the government. So, it is really income tax, but it's a different matter that the Internet company may gross the charges up by 6 per cent and the burden may come upon the Indian company. But to that extent, the Internet company's competitiveness may come down.
The government has been talking about simplification of tax laws. You constituted the Easwar Committee which gave its first set of recommendations, of which you accepted some. What next?
About 17 out of the 20 recommendations (made by the panel) have been implemented. We have not accepted the recommendation on reducing the TDS rate on bank deposit from 10 per cent to 5 per cent. We did not agree to this as it would have caused a huge loss to us. What is happening is that many people who have bank fixed deposits fall into the 20 per cent and 30 per cent tax slab, but they do not come forward and disclose the interest earnings in tax return. So, if we do not tax them even at 10 per cent (TDS), we would lose that money, too.
Our income tax laws are very complex and the committee would give us recommendations in installments to simplify the more complex clauses that are causing maximum litigations. The committee has a tenure of one year, and they are supposed to come up with recommendations every two to three months.
Are we really heading towards simpler tax laws, given that GAAR and POEM would come into existence next year, equalisation levy has already created a lot of confusion and there would be more (Base Erosion & Profit Shifting) BEPS-related changes?
GAAR (General Anti-avoidance Rule) doesn't mean there is lack of simplicity, it is an anti-abuse provision; it is not supposed to complicate matters for anybody. It would help the tax department to catch some people who are using tax haven route to avoid tax.
POEM (Place of effective management) is not going to be a problem because the guidelines are very clear and the way we are going to ascertain the residence status is in public domain - people have given their views on it and we have finalised them. POEM is going to be in force from next year, there is no going back on it, but it is not going to harass the authentic Indian multinationals. POEM will only impact those firms which are running shell companies outside.
Equalisation levy is one of the recommendations of the BEPS action plan. What about the others?
There are 15 recommendations of the BEPS (action plan) that we are following. Others include information exchange and multilateral agreement. India would be one of the early adopters of these recommendations. We are willing to be a partner in sharing information on a multilateral platform. India is at the forefront of BEPS initiative and we should be able to get the best out of it.
Some of the decisions of the previous governments such as retrospective taxation and tax demands on certain companies received severe criticism from all quarters. This government promised that it would not resort to such aggressive tax demands. However, the recent decisions of the government - raising tax demand on Vodafone and Cairn India - are reminiscent of the earlier days. Your comments...
I don't think it is fair to say that this government has resorted to any retrospective taxation. This government has been continuously saying that there will not be 'in future' any retrospective taxation. The key term is 'in future'. But whatever amendments were made before this government came to power...we would like those to stay and legal cases would be decided as per the law of the land. This is the clear position that the government has taken since 2014 and there is no change. Having taken that position, the world must understand the meaning of it.
The recent Panama paper leaks have brought back the issue of black money stashed abroad. The government had earlier received similar information, but has it been able to make the most of it?
We have been able to bring the guilty to book, and that is what we have mentioned in the statement issued the very next day of the Panama leaks. We have given a detailed account of how many companies we have information about and what is the level of prosecution in the earlier leaks. This time, too, we are confident that whatever information we get, we will bring more companies to book.
What is the next step in this case?
We have already set up a multi-agency investigating team, which is looking into the matter. We are not going to discuss the internal mechanism because that would impact the investigation.
How difficult is it to get information from countries with which we have the Tax Information Exchange Agreement (TIEA), given the clauses in the agreement that dissuade forcing any country to divulge details?
There are very few countries with which we do not have the information exchange agreement. We have such agreements with more than 130 countries, either through the Double Tax Avoidance Agreement (DTAA) or through a separate treaty for information exchange. There is no problem (in getting information) with those countries, but there are some countries with which we don't have such agreements. It is a bit difficult to get information from them. But indirect sources help us get the information from those countries as well.
What are those indirect sources?
I don't want to disclose the sources, but we would be able to go to the bottom of the companies which have set entities in such countries. We can also ask the companies (named in the leaks) to tell us directly if the reports (of their opening foreign entities) are true.
The government made an announcement to remove exemption in corporate taxes and subsequently brought the tax rates down. Is it possible for the government to remove all exemptions?
We have given a draft roadmap to remove the exemptions, and the Budget has given the final roadmap. What we have already announced is possible (to implement).
When are the corporate tax rates slated to come down?
It may take some time because the effect of the gains from removal of exemptions is very gradual. If we have to reduce 1 per cent tax rate across all companies, we would lose `15,000 crore annually, as against the Rs 3,000 crore gain by removing the exemptions, that too in 2017/18. This year, we are not getting anything from removal of exemptions and even then we have reduced the tax rate for companies with turnover of less than Rs 5 crore by one percentage point.
Though the Budget announcement to tax EPF withdrawal was reversed, in the Economic Survey report, the government has said that tax-free interest income from PPF is a kind of subsidy to well-offs. Will PPF returns be made taxable in future?
Right now there is nothing on the cards, but could be at the time of Budget. We can't predict anything now.
But, in general, should we be moving towards EET (Exempt-Exempt-Tax) regime?
Well, that should be the principle. It's a different matter that some educated, well-to-do, middle-class people who were affected by the proposal (to tax EPF withdrawal) did not like it. But that should be the direction.