JULY 19, 2014

By Ashish Sabharwal & Vipul Sippy, Deloitte Haskins & Sells LLP  

THERE is no doubt that globalization has resulted in a rapid increase in the cross border transactions, giving rise to complex tax issues and challenges. The Indian tax environment, in the recent past, has witnessed a variety of disputes owing to diverse interpretation of tax laws adopted by the Revenue Authorities on the treatment of various tax issues which has contributed towards India being perceived as a “litigious” country.

Seeking to address the concerns of multinationals in India's dispute resolution mechanism, the Finance Minister (“FM”), while presenting the Union Budget 2014, has announced a range of positive proposals to reduce litigation, including introduction of rollback mechanism in the Advance Pricing Agreement (“APA”) scheme. It is proposed that the “rollback” relief would apply to transactions entered into during the last four years prior to the period covered under an APA. Further, such “roll back” relief is proposed to be provided on a case to case basis, subject to certain conditions.

The APA rules, introduced in the year 2012, are meant to provide certainty to the taxpayers by specifying in advance the arm's-length pricing in cross-border transactions among related parties for a period of five years. With multinationals facing huge tax demands on account of transfer pricing adjustments by the Revenue Authorities in the recent past, rollback of APAs to past years is indeed a welcome move.

In the present scenario, the country's litigation system is perceived as “time-consuming” and costly. The time limitations are generally recommendatory and the approach of the Revenue Authorities is perceived to be pro-revenue.

Whilst the set-up of Authority for Advance Rulings (“AAR”) was aimed to provide certainty to non-residents, the mechanism has not fully achieved the stated objectives, especially due to the time involved in pronouncing the ruling. In a positive move, the Union Budget 2014 has proposed to strengthen the AAR by constituting additional benches. Further, it has been proposed to extend advance rulings to residents in respect of their income tax liability above a defined threshold.

The FM, in his Budget Speech, has also emphasized on enhancing the scope of Income-tax Settlement Commission (“Commission”) so that taxpayers may approach the Commission for settlement of disputes. On the administrative front, the FM has proposed the constitution of a High Level Committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required.

The Union Budget 2014 has not addressed the major concerns of the business community on Retrospective Amendments in Law and General Anti Avoidance Rules, completely. While the FM has proposed that all cases arising out of retrospective amendment of 2012 in respect of indirect transfer will be scrutinized by the High Level Committee (to be constituted by the Central Board of Direct Taxes) before any action is initiated in such cases, the corporate fraternity was awaiting much more clarity on the said issue.

In a nutshell, this year's Budget has a strong focus on strengthening India's dispute resolution mechanism, which was much-needed in the wake of rising disputes. The opening up of avenues for a quicker dispute resolution is likely to go a long way in addressing tax issues of the corporate fraternity. It is expected that the Budget proposal of constitution of a High Level Committee should give a clear message to the global business community on India's commitment towards an efficient, stable and consistent tax regime.