The Tax Administration Reform Commission (TARC) has a word of advice for Finance Minister Arun Jaitley on the quality of fiscal consolidation he should try for in his maiden Budget for 2014-15.
The body, headed by tax expert Parthasarathi Shome (pictured), cautioned the government against pursuing an aggressive revenue targeting policy to achieve a better fiscal target figure. It also criticised transfer pricing measures used by the tax department for leading to a large number of disputes with Indian subsidiaries of multinational corporations (MNCs).
“The TARC observes that the revenue target policy has been erroneous in as much as it is not just the numerical figure of fiscal deficit that counts but its quality,” the Commission said in its first report.
If a fiscal deficit is reduced through coercive government action in an era of global information, international rating agencies are going to take note of the overall business environment, the panel said.
Merely reducing the quantified fiscal deficit is not sufficient, since the focus turns also to the quality of deficit reduction, it said. “Herein lies the fallacy of pursuing a blind deficit reduction policy. It has to be matched, instead, with appropriate approaches towards revenue collection both from tax administrator and taxpayer point of view,” it added.
The ruling Bharatiya Janata Party had said in its election manifesto that it would bring in a trusting, non-adversarial and conducive tax environment.
On the ground
Deloitte Haskins & Sells partner Neeru Ahuja said, “Industry always says that we are happy to pay taxes. However, officials rush to raise tax demands from December onwards, because they are given high tax targets.” Officials know these demands do not hold ground, yet they raise these, she said.
Often, it is seen that tax figures rise in March and after-March; these have to be refunded, says another tax expert.
According to the Controller General of Accounts, only Rs 51,189 crore was collected as tax revenue (net of state devolution) in February, but the figure jumped to Rs 1.89 lakh crore in March, the final month of the financial year. One might argue that advance tax collections are also paid in March, so it would always have greater revenue than February. Yet, Rs 1.21 lakh crore of tax collections were made in December 2013, when higher advance tax collections of 30 per cent of the total was deposited by companies than the 25 per cent in March.
Vikas Vasal, partner at KPMG, said the extreme fiscal position faced by India had led to the revenue department giving such tax targets to officials. “This is leading to a huge number of litigation over tax disputes, not a conducive story,” he said.
There is an official road map for fiscal deficit reduction till 2016-17, final year of the 12th Five-Year Plan. According to it, the deficit should come down to 4.6 per cent of gross domestic product (GDP) in 2013-14 and 4.2 per cent in the current financial year. The deficit, in fact, declined to 4.5 per cent in 2013-14 and former finance minister P Chidambaram had reduced the target further to 4.1 per cent for 2014-15 in the interim Budget.
The panel also came down heavily on “wrong” policy in transfer pricing, which has given rise to disputes with Indian subsidiaries of MNCs.
“In India, transfer pricing measures are used for revenue generation, which comprises a completely wrong approach. This is revealed through the allocation of revenue targets to transfer pricing officers (TPOs) from transfer pricing adjustments. This is unheard of internationally,” the Shome panel said.
Accordingly, India has clocked by far the highest number of transfer pricing adjustments, demanding adjustments even for very small amounts, it said.
Of about 3,200 cases taken for a transfer pricing audit in 2012-13, an adjustment of Rs 70,000 crore was made in nearly 1,600 cases, against an adjustment of Rs 44,531 crore in 1,343 cases in 2011-12. In 2013-14, the number of cases is in the range of 3,200. However, the adjustment made to the income of Indian subsidiaries of MNCs surprisingly dropped to Rs 59,000 crore.
Shell and Vodafone had received transfer pricing orders of about Rs 3,000 crore each in 2013-14. Both have disputed it in courts. Shell and Vodafone had received adjustment orders last year, too. Essar, Bharti Airtel, Microsoft, Maruti, Gillette and IBM were among other companies to get such.
“TP has become a convenient way of raising tax demand. It is very easy to have a different opinion in TP, as it is a very subjective area. Maximum disputes are in TP and the maximum disputed amount is also in TP,” said Ahuja.
The Shome panel said there was also a high incidence of variation among TPOs in their adjustments for similar transactions or deemed transactions. “Taxpayers reported that they often succumb to such adjustments simply to carry on with business activity; otherwise, they would have to allot or divert huge and unavailable financial and staff resources to such activities,” the panel said.
SHOME PANEL CAUTIONS GOVT
Tax Administration Reform Commission (TARC) says numerical value of fiscal deficit is not the only concern but its quality as well
If coercive methods are used to collect taxes, quality of fiscal deficit will come down
In that case, rating agencies will note the deteriorating business environment in India
Says transfer pricing mechanisms used to augment revenue generation when the goal should have been to minimise tax avoidance
This is the first part of TARC reports. The commission will work for one more year