Uncertainties in tax policy should be minimised, at least in the short-term, and forward-looking changes be made only in the medium-term, said C Rangarajan, chairman of the Prime Minister's Economic Advisory Council. His comments came while the government is reviewing amendments to the Income Tax Act and the General Anti-Avoidance Rule ( GAAR).
"The investor should be confident enough that no sharp changes are likely to be there at least during the implementation of the project," Rangarajan said at a seminar on tax reforms and tax administration.
"Sunset clauses, if any, need to be explicit," Rangarajan said.
He did not specifically name retroactive amendments to the I-T Act and GAAR. However, these two provisions of the Budget evoked wide-spread criticism from investors. Following this, the government had appointed a committee under tax expert Parthasarathi Shome to review these provisions.
The panel recommended deferment of GAAR, which was proposed to come from FY14, by three years. On retrospective amendments, it said amendments be made applicable from a future date, and not retroactively. In rare cases, where new provisions have to be made effective from retroactive effect, tax should be asked from the one making capital gains.
The government had slapped a Rs 11,000 crore tax notice to Vodafone for its $11-billion overseas deal to acquire Hutch's stake in the then Hutchison Essar (now Vodafone India).
Rangarajan also expressed the hope that legislations to roll out goods and services tax GST would be passed soon.
He added that contentious issues such as compensation to states for loss of revenue due to reduction in central sales tax rate and the issue of autonomy of states will be sorted out soon.
The Parliamentary Standing Committee on Finance is yet to submit its recommendations on the Constitution Amendment Bill to enable levying of GST, which requires separate legislations by states and the Centre.
Rangarajan said GST and the proposed direct taxes code (DTC) would establish an economically efficient, cost-effective and transparent tax system, but other taxes at the state-level need to be further reformed.
He also prescribed that specific purpose taxes or levies should be utilised only for the purpose for which these are levied. "This is important to provide confidence to the taxpayers that the government indeed deserves to collect such taxes. This is illustrated through the education cess levied by the Centre."