India Advantages – Vision 2020
Hon’ble Shri Justice F. I. Rebello
Hon’ble Justice Rebello provides a unique perspective from his position as sitting judge of the Bombay High Court with rich experience in tax matters as to the advantages available to the Country and how we can capitalize on them. He lauds the use of technology and points out that this has not only reduced the delay in disposal of tax matters but has also resulted in complete transparency in the functioning of Courts.
1. Introduction
Mr. Vimal Gandhi President of ITAT, President of AOTCA. Mr Gill Levy, Mr Bharatji Agrawal Sr. Advocate and National President of AIFTP, Dr K. Shivaram, Chairman of International, Tax Conference Committee, Mr. M.L. Patodi the Dy. president AIFTP, Foreign delegates, delegates from different parts of our country, members of ITAT, Sales Tax Tribunal, Ladies and Gentlemen.
I am honoured to be invited to Inaugurate this first “International Tax Conference” of AIFTP, which is held at Mumbai which is the commercial hub of India. I am delighted to know that more than 50 foreign delegates from 10 countries are attending this conference.
Sitting on the tax bench of High Court of Bombay I had an opportunity to deal with various complex issues including the provisions of Double taxation agreements, OECD Commentaries etc. In one case the issue involved was whether the Singapore company having no permanent establishment in India can be assessed to business income through its agents in India for canvassing advertisements, we have held as there was no business connection, the Singapore company cannot be assessed here. [Set Satellite (Singapore) PTE Ltd. vs. Deputy Director of Income Tax (International Taxation) & Anr, (2008) 307 ITR 205 (Bom.)]
Let me share with you our experience in the High Court at Mumbai in Mumbai, we are making a very sincere attempt to bring down the pendency of cases in High Courts. New matters which are filed, come up for admission within seven days of filing of the Petition. Depending on the approach of the Bench, even if the petitions are admitted, they will come up for final hearing within two years. My personal approach has been to dispose of 90% of the matters at admission stage itself after giving an opportunity to the respondent
I am of the opinion that an International seminar like this, gives an opportunity to the Advocates and Chartered Accountants to study indepth the International taxation issues to better equip themselves.
The topics selected for discussion are, of extreme important they in today’s global scenario. They are:
a) Doing business in India,
b) Doing business in Australia,
c) Transfer Pricing,
d) Double taxation agreements,
e) VAT – comparison
f) Mergers and Amalgamation.
And,
g) Current Developments in International Taxation.
.. there has been some concern in legal circles, both in India and abroad about the judgment of the Indian Supreme Court in Venture Global vs. Satyam Computers reported in (2008) 4 SCC 190. The said judgment has permitted the set aside of foreign awards in India even when India is not the seat of arbitration. A considered analysis of the judgment would require that any such concern be tempered. Firstly, the said decision is not indicative of any nationalistic approach being adopted by the Supreme Court ..
The law on the above subjects has many grey areas. In most areas it is evolving. That is why it is often said, that time and experience helps to better understand and interpret the law. This Seminar I am sure will help immensely to build a great platform for the professionals in developing their knowledge on the subject of transfer pricing, international taxation, amalgamations and mergers. Such seminars also brings together people from different regions and allows a better understanding of our cultural diversities and the global economy.
I am sure the two days discussion will be very fruitful.
2. Technology
Technological innovations have removed the geographical barriers. The world has became one global village. The rapid development of electronic commerce (E.Commerce) as a medium for doing business has now become more challenging for tax authorities. Income-tax Act, and Double tax avoidance Treaties are based on the geographical location and physical presence, therefore the most important issues of taxation of e commerce is,
whom to tax?,
when to tax ?
where to tax ?
and who has jurisdiction to tax?
The high powered committee on E. commerce constituted by the Central Board of Direct Taxes in India has forwarded its reports to Government .The expert committee opined that the present income tax law in India is not broad enough to tax transactions relating to E. Commerce. [( 2001) 251 ITR St 118]. The law on the subject of taxation of E. Commerce is yet to develop.
On the subject of Domain name, our High Court in Rediff Communication Ltd. vs. Cyberbooth AIR 2000 Bombay 27 has held that the internet domain names are of importance and can be a valuable corporate asset. The domain name is more than an internet address and is entitled to equal protection as trademark.
3. Progressive movement of India towards delicensing and deregulation
The policies of the Government have changed radically since 1991, the year in which our economy opened up to foreign investment in a big way. Privatisation, liberalization, investment friendly policies, and progressive reform process have resulted in giving a big boost to our economy. Today Foreign Direct Investment is allowed in almost all sectors barring few sensitive areas such as defence. Further FDI is allowed in most of the sectors under automatic route, except in a few cases, where approval from the Foreign Investment Promotion Board is required.
For attracting foreign investors Govt. of India has liberalized Foreign Exchange Management Act, Introduced Information Technology Act, Money Laundering Act, Right to information Act, Uniform Value Added Tax (VAT), etc. The Empowered Committee of State Finance Ministers has been entrusted with preparing a roadmap for the introduction of national level goods and services tax, which is likely to be introduced with effect from 1-4-2010. These are the steps in right direction as per the World Bank’s report ‘Doing Business 2010 – South Asia (SA)’.
In India, procedures under 2002 Securitization Act have became more effective, easing the process and reducing the time required to close a business.
4. Taxation system in India
India has a well developed tax structure with clearly demarcated authority between State Governments and local bodies.
Central Government levies taxes on income (except on agricultural income which State Government can only levy), Customs Duties Central Excise and Service Tax.
Value Added Tax (VAT) stamp duty, state excise, land revenue and professional tax are levied by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like drainage, etc.
Indian taxation system has undergone tremendous reforms during last decade. Rates have been rationalised and tax laws have been simplified resulting in better tax compliance and better enforcement. We have a very mature tax system and tax administration. There is an ongoing process of tax reform. The new Direct taxes code has been in discussion to simplify the tax law and administration. Corporate tax rate in India is only 35% which is considered as one of the lowest in the developing countries. As per the proposed Direct taxes code, The proposed uniform corporate tax rates will be 25 per cent for both domestic and foreign companies, As per the paper report dt 6-11-2009 (Financial Express). Our Finance Minister has stated that “we are trying to bring the new taxation regime, which can last for another 50 years. Therefore our endeavour is to see that new tax system should include the basic features and time tested procedures of existing Act which have survived judicial scrutiny over the years”
5. Proposals for constitution of HI-Tech Fast track commercial divisions in High Courts
With rapid increase in commerce and trade, commercial disputes involving high stakes are likely to increase. Foreign Investors in India must be assured that the Indian Courts are as fast as the Courts in most of the developed countries of the world and there are no longer lengthy delays in the judicial process. With this in mind the Law Commission of India in their 188th report – December 2003 recommended for constitution of High-Tech Fast-Track commercial divisions in High Courts. At the conference of the Chief Ministers of States and the Chief Justices of various High Courts which was held on August 16, 2009 took the decision that commercial division be constituted by the High Court within itself as and when legislation in this regard is made and notified by the Parliament. The Bill is likely to be introduced in the Winter session of Parliament this will help the foreign investors in a big way. The Commercial Division will be equipped with all high–tech systems and –online filing system. These courts will be similar to the Commercial Courts of New York, UK and Singapore.
Let me share with you our experience in the High Court at Mumbai in Mumbai, we are making a very sincere attempt to bring down the pendency of cases in High Courts. Mumbai contributes more than 40% of direct taxes revenue, also, 50% of the tax litigation. The pendency of tax litigation now is very nominal due to the efforts put in by the Tax Benches. Between 2007-2009 by the joint efforts involving Income Tax Department, Income Tax Bar, Registry of the Court over 12,000 matters have been disposed of. As a consequence, as of now, other than writ petitions, the pendency of tax matters is approximately 1,300. New matters which are filed, come up for admission within seven days of filing of the Petition. Depending on the approach of the Bench, even if the petitions are admitted, they will come up for final hearing within two years. My personal approach has been to dispose of 90% of the matters at admission stage itself after giving an opportunity to the respondent.
Before the Income Tax Appellate Tribunal which is final fact finding authority, the pendency is only 42,000 appeals. These matters are disposed of within one year of filing of the appeal, even at Mumbai and in smaller places within six months.
Therefore as far as tax litigation is concerned there is no unusual delay in disposal of tax matters. I may also share with you that there is complete transparency in the functioning of Courts. The cause list is available on the respective web site of courts and all orders of High Courts and Supreme Court are available on site. Sitting in any part of the world one can access it and make use of the same.
6. Advance Rulings Ss. 245N to 245V
Under the Income-tax Act, there is a provision for approaching the Authority for Advance Rulings. Non-residents can approach the Authority for Advance Rulings for direct as well as indirect taxes issues, for determination by the Authority in relation to a transaction which has been undertaken or proposed to be undertaken by resident applicant with a non-resident. The Authority for Advance Rulings is headed by retired judge of Supreme Court of India. As per the law this authority shall pronounce its ruling in writing within six months of receipt of application. As per the Act, the ruling is binding on both the parties.
7. Double Taxation Agreements
India has signed Double taxation agreements with 80 countries. As per Section 90(2) of the Income-tax Act, when three is conflict between Income-tax Act and double taxation agreements, the assessee can follow the law which is more beneficial to them. The provision of Clause 258 in the Direct Tax Code seeks to modify the position by making the provision of the Code or Treaty which is later in time to prevail.
8. Indirect tax law in India – Broad outline
From the point of view of taxation, the law relating to imports is mainly contained in the Customs Act, 1962 and the Customs Tariff Act, 1975. The Customs Tariff Act contains the Schedule for import tariff purposes. This Schedule is fully aligned with the internationally accepted Harmonized System of Nomenclature, ever since 1986. The Schedule is also being amended from time to time to bring it in line with the amendments to Harmonised System of Nomenclature. Thus, the Customs Tariff Schedule is fully in line with the HSN.
The other major aspect is valuation for customs duty purposes. On and from 16-8-1988, the valuation of imported goods has been modelled on the GATT Valuation Code. Now it is completely aligned with the Code Valuation Code with the amendment of section 14 of the Customs Act w.e.f. 10-10-2007. Subsequently new Customs Valuation Rules have also been enacted by the Central Government. Thus the Customs valuation is fully aligned with GATT valuation.
The Customs Act 1962 is broadly in line with the international practice relating to the procedural matters also. Finance Act 2009 carried out further amendments to incorporate the commitments under Kyotoa Convention. In addition, India also has provision relating to anti-dumping under sections 9A to 9C of the Customs Tariff Act read with Anti Dumping Rules. This is modelled on Anti Dumping Agreement of WTO. Similarly, provisions relating to safeguard duty are contained in section 8B (and under section 8C for import from China). These also are modelled on the WTO agreement. Section 9 of the Customs Tariff Act relating to countervailing duty on imported subsidized articles read with the relevant Rules is also based on the WTO agreement. Thus, by and large, the law relating to the customs is in line with the International Commitments/Agreements.
Interestingly and incidentally India is the largest practitioner of anti-dumping investigations and safeguard investigations. This may perhaps to do with the liberalization of the economy and in the recent past to the economic recession.
The other major indirect taxes levied in the country namely Central Excise duty and service tax are levied by the Central Government. Sales tax/turn-over taxes are levied by the State Government. The schedule to the Central Excise Tariff for levy of Central Excise duty is again modelled on Harmonized System Nomenclature of WTO. Rationalizing the different tariff rates has eliminated to a large extent disputes on the issue of classification.
Service tax was a recent phenomena, introduced vide Finance Act, 1994 only on three services. Now, it covers more than 100 services. Each year Government of India is adding new services for the purpose of taxation.
The State Governments which hitherto levied sales tax have introduced major reforms in the year 2005-06 by adopting Value Added Tax as the basis of the levy of sales tax. Though, significant differences exist in the VAT legislation between various States the value added tax together with its input tax credit is a major reform, introduced by the State Governments in the year 2005-06.
As part of the further reform process, the Government of India and State Governments are seeking to introduce the new “Goods and Services” Tax. In fact, the first discussion paper has been released on 10th November, 2009 representing the view points of the States. Broadly all transaction of goods and services is sought to be taxed both by the Centre and by the State. There will be dual tax consisting of a Central GST and a State GST. The Central GST will be governed by the legislation of the Parliament. The State GST would be governed by the legislation by the State. It is expected that on the main features, namely, taxable event, taxable activity, assessment etc., the legislations of various States are expected to be uniform. The significant aspect is that the services would also be taxed by the State as part of the State GST. The input tax credit would be seamlessly available between the goods and services. However, the Central GST will not be allowed as input tax credit for the State GST and vice versa. An innovative model has seen relating GST on interState transactions involving more than one State.
In keeping with the best international practices, consumption principle has been adopted for levy of tax on services on intranation transaction. Consequently, the exports of services are zero-rated since they are for consumption outside the country. On the same token, the imports of services would be taxed in the country since these are destined for consumption within the country. Thus, on this aspect, service tax broadly follows the normal international practice. Introduction of GST is a mammoth and gigantic step indirect tax. Once introduced, it will be in line with the VAT/GST model being followed in many countries including the rating of exports and taxation of imports of goods and services into the country. The Government has an ambitious plan to introduce GST across the country from April 2010. Recent pronouncements indicate that it may not be achieved by that date. Once GST is introduced, it is expected that the indirect tax structure will be on the lines prevailing in many countries in the world. It remains to be seen to what extent and how quickly this will be fulfilled.
9. Arbitration, Conciliation and Mediation
Owing to its transparent, flexible and predictable legal system India can be considered to become the main centre for dispute resolution through arbitration and mediation .The difficult economic climate means that the number of disputes and differences on contracts around the world is predicted to rise. As the global slowdown continues dispute resolution will be an effective means of resolution of cross border contracts.
The law of Alternate Dispute Resolution has undergone considerable developments in recent years in India. Conciliation proceedings have been regulated and awards therein are now enforceable as decrees under the Arbitration and Conciliation Act 1996. Similarly Mediation has received statutory recognition under section 89 of the Code of Civil Procedure 1908. There is thus a serious attempt in India promote these methods as viable alternatives to mainstream litigation.
With regard to Arbitration however, there has been some concern in legal circles, both in India and abroad about the judgment of the Indian Supreme Court in Venture Global vs. Satyam Computers reported in (2008) 4 SCC 190. The said judgment has permitted the set aside of foreign awards in India even when India is not the seat of arbitration. A considered analysis of the judgment would require that any such concern be tempered. Firstly, the said decision is not indicative of any nationalistic approach being adopted by the Supreme Court, as it was indeed the interests of the foreign party that were sought to be protected. The approach adopted is not wholly different from that adopted by other jurisdiction, in applying the principles of international public policy. The said judgment must be construed as an attempt by the Supreme Court to do justice in the peculiar facts of the case. Secondly, the Venture Global judgment itself preserves a great deal of "party autonomy", in that it is open to the parties to opt out of any of the provisions of the Arbitration Act 1996 (including the provisions relating to set aside) by an agreement between them. Foreign awards are enforceable under sections 49 and 58 of the Arbitration and Conciliation Act. The challenges are limited to the extent of Public policy as understood in international law rather than domestic public policy. See Renusagar Power Company Limited vs. General Electric Co. AIR 1994 SC 860.
Therefore, Arbitration, Mediation and Conciliation in India collectively provide a speedy, efficient and just alternative to the regular courts.
10. Transfer Pricing Regulation.- Dispute resolution panel
One of the subjects for discussion in the seminar is Transfer Pricing.
Section 144C, of the Income-tax Act, permits reference to dispute resolution panel on very first day of October, 2009. Dispute Resolution panel means a collegiu comprising of three Commissioners of income-tax constituted by the Board for the purpose. Order passed by the transfer pricing authority can be referred to the Dispute resolution panel. In Addl. CIT vs. HCL Technologies (2009) 225 CTR (SC) 356, Apex Court advised the parties to refer the matter to dispute resolution panel even in respect of the orders passed earlier.
As per the provision, the officer has to pass the order with in one month in which the direction is received from the Dispute Resolution panel. Assessee can file an appeal to the Tribunal against the order passed pursuance of such direction to the Tribunal , however the direction is binding on the tax authority and the tax authorities cannot file an appeal to the tribunal against the direction.
11. Legal process outsourcing
India is recognized as emerging leader in the Legal process outsourcing industry. This is mainly because of talented English speaking Lawyers, Chartered Accountants, Computer Education, Development of Technology and Our Legal System which follows the British tradition. The Apex court, High Courts, quasi-judicial Authorities, the Tribunals, Tax administration, the proceedings are conducted and orders are passed in English. The language of the High Court under Article 248 is English. All Judgments of the High Court under Article 248 of the Constitution must be written in English. The language of the Supreme Court is English. The Legal opinions and the Arbitration proceedings are in English Language.
In India, Service sector contributes 51% of India’s GDP. We have 9,55,013 Lawyers and 1,53,600 Chartered Accountants and good number of other professionals. In India the profession is subject to statutory law like Advocates Act, C.A. Act, etc. The governing bodies of the organization, in turn formulates code of conduct.
Now the Indian Government has introduced “Limited Liability Partnership Act 2008,” which has come into effect from 31-5-2009. which may help in having larger firms of professionals.
12. Advantage India
India represents the biggest democracy in the world with its multi culture multi language and multi religious back ground which is truly secular and which makes India a very attractive for investment. The Constitution of India the supreme law of land protects citizens fundamental rights enshrined in Part IV. At the same time it protects non-citizens from arbitrariness and their right to life and liberty. In the matter of tax, Article, 265 provides that “no tax shall be levied or collected except by authority of law”. Our judicial system is very proactive in protecting the rights given by the Constitution and the law.
India has also many advantages such as :
(1) Skill-intensive service sectors.
(2) It has an entrepreneurial culture.
(3) A much younger population, which means that their saving rate is going to increase in the future.
(4) Skilled man power
(5) India’s infrastructure is developing, keeping pace with growing economy.
Therefore considering the commercial and legal advantages, I am of the view that India has many advantages to do business. In recent times as per the paper reports Indians are also acquiring the business abroad and making huge investments and in that context the discussion on the subject of mergers and acquisition may be very interesting to the participants.
I wish all success to the two days of the international tax conference hosted by AIFTP and wish all foreign delegates/guests and Indian delegates a very comfortable stay at Mumbai.
[Reproduced with permission from the speech delivered at Inaugural Function of 1st International Tax Conference, AOTCA Mumbai Meeting 2009 on 19-11-2009]