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Indian Tax Uncertainty a Global Risk

Posted on June 20, 2014 by Conrad Mapp and David D. Stewart

The shareholder reports of two "Fortune 100 brand-name, iconic U.S. companies" rank Indian tax uncertainty among the top five global risks, Melissa Frakman, director of financial policy at the U.S.-India Business Council in Washington, said June 16.

Speaking at Bloomberg BNA's Investing Into India: Legal and Tax Update in Crystal City, Va., Frakman said that for these companies, "U.S. fiscal budget concerns and Africa political concerns are up there with India tax concerns."

Bala Rajaraman of the New York office of Deloitte LLP noted comments from Prime Minister Narendra Modi that the previous government had "basically left the coffers bare" and that there would be "some short-term pain and suffering" before the government could stabilize the fiscal situation and promote policies that drive growth.

Nobody really knows what that means, Rajaraman said, but it is possible that some of the tax incentives people are counting on may not come to pass. "[There is] speculation that some of the relief measures that companies have asked for, in terms of relief from the [minimum alternate tax] provisions, may not be immediately available," he said.

Rajaraman also noted recent comments speculating that the rollout of the goods and services tax regime has been delayed because of issues the states have brought up. "So the government has said we want to focus on trying to harmonize all the potential issues and get all the states to agree to a common framework to be able to implement a set of indirect tax reforms."

The Direct Taxes Code is also under consideration, according to Rajaraman. India's new finance minister, Arun Jaitley, is a corporate lawyer who "understands business and understands the tax issues," he said. "Many people believe he will take a more pragmatic and practical approach towards implementing any sort of tax reform, but as to where the Direct Taxes Code goes, what provisions will come into play, what will be the new tax code going forward for corporate taxpayers, are all up in the air," he added.

"There has been a pretty serious policy paralysis in India," said Shanto Ghosh of the Boston office of Deloitte Tax LLP. "The government, which was not a majority government, was unable to push through substantial reforms -- that caused [foreign direct investment (FDI)] to shrink quite a bit."

India's fiscal issues "are a bit of a scary situation," Ghosh said. "The government's fiscal deficit is something that they need to control, and for that, unfortunately, we do not see major incentives being given on the tax front because they can't afford to lose out on tax revenue. Their hope is that they will improve certainty on many sectors of taxation that will allow others to come in and do business and hopefully increase the tax revenue."


Abundant Optimism

K.R. Sekar of Deloitte India said he is optimistic about the prospects for tax reforms under the new government. He pointed to the government's recent action to accept the report of the Tax Administration Reform Commission (TARC). The TARC was created in August 2013 under the previous government and is headed by Parthasarathi Shome.

Sekar said that he participated in the TARC and that Jaitley has requested a detailed meeting on the report to be held June 19. According to Sekar, the new government's embrace of the report demonstrates its seriousness about tax system reform. He said that the next test of the government will be on how it chooses to implement the general antiavoidance rule set to take effect in April 2015.

Frakman expressed optimism as well. "It's a really exciting time at the U.S.-India Business Council. We felt like for the last couple years we were cheerleaders for a market that nobody was excited about. Everybody was down on India, investment was low, FDI had dropped precipitously. The climate has really changed; there's significant optimism."

Frakman pointed specifically to the government's "willingness to push forward the GST. [It] has been highly politicized for years, but we see it as integral for streamlined cross-Indian trade. Each state has separate tax regime, separate licensing, etc. The GST will streamline the whole thing."

With the early July budget, "we are expecting some significant things," Frakman said, "including clarification on a lot of the tax policy."