By Surya Prakash B. S.
There is an urgent need for the Union Finance Ministry to set up an open and transparent process of evaluating impact of changes to tax law before they are enacted. This could be the first step in a re-engineering of the government process that is needed for good governance.
A case in point is the recently announced rules that allow residents to get advance rulings. During the Interim Budget in July 2014, the facility of advance rulings, which were until now available for transactions with non-residents, were extended to transactions with residents also. And after a long wait, rules for making an application were recently announced (see here and here) – the Bench that will actually hear such applications is yet to be set up.
And as is its wont, the Central Board of Direct Taxes (CBDT) without any public debate notified that only those residents’ transactions that may have a tax liability of INR 100 crore or more are eligible to use this facility of advance ruling – a similar monetary threshold does not exist for non-residents’ transactions. A 100 crore tax liability estimate means that the transaction/s would most likely be approximately INR 300 cores or INR 500 crores in most cases.
The question is: Why INR 100 crores – why not any other number? What was CBDTs estimate of the number of tax payers that would be eligible for this route? Or rather, did CBDT evaluate how many resident taxpayers would be rendered ineligible because of this arbitrary threshold? There may be other reasons that may make this dispute resolution facility ineffective – let us limit ourselves to the question of the process of arriving at changes to tax law.
From the scratchy details available in the public domain we could attempt some estimation. For a moment let us assume that only companies with a profit of INR 100 crores or more can have transaction/s that are eligible for this advance ruling facility. This means that less than 1 percent of the total number of companies would be impacted (Statement of Revenue Foregone by the Finance Ministry, Table 1, p. 24). Even if were to remove loss or nil profit making companies, the percentage of companies impacted still remains less than 1%. If were to try attempting this with the non-corporate sector, the situation looks even worse. Hampered as we are with the lack of same level of granularity of information, we could estimate that the average non-corporate tax payer’s profit before tax was INR 10 lacs (Statement of Revenue Foregone, p. 28). How many of these would be eligible is anybody’s guess at this stage.
The outcome may have been different if stakeholders were consulted and an impact assessment was carried out. This should not come as news to regulators. The recently released third report of the Tax Administration Reforms Committee dedicates an entire chapter to such an exercise giving details of global best practices and recommending that the process be institutionalised.
And the CBDT has an opportunity to start this practice by asking for an impact analysis for each of the recommendations from the High Level Committee set up on 4 December to hold consultations with trade and industry. Or it could conduct an impact analysis before acting on the recommendations.
When and whether those recommendations will be heeded to, is the hundred crore question.
Surya Prakash B. S. is a student of Takshashila’s flagship public policy course, the Graduate Certificate in Public Policy.