Taxing Times For Make In India
CBTD will scare away investment if it is allowed to pursue witch-hunts on businesses
It is not rocket science to understand that the PM's Make in India programme will be derailed without fresh investment. Therefore, the Central Board of Direct Taxes (CBDT), which earned opprobrium for unleashing 'tax terrorism' during the last few years, should be prevented from driving away both domestic and foreign investors from India.        CBDT vitiates the investment climate because of several factors - extreme complexity of income tax laws, combative and rent seeking attitude of tax officers, aggressive pursuit of revenue targets, an anti-FDI mindset that was promoted by UPA, over dependence on judicial remedy, extensive recourse to retrospective measures, and contentious interpretations of legal provisions. These features, which have created an environment of great uncertainty and outright harassment for both domestic and foreign direct investors, must be urgently addressed if India is to revert to a high growth trajectory.        Some facts will help. First, there are about 3 lakh pending direct tax legal disputes of which 2.23 lakh are within the jurisdiction of CBDT itself. Second, an enormous amount of Rs 4.36 lakh crore ($73 billion) of direct tax revenue is locked up in these cases according to the Mumbai high court the government is a litigant in a great majority of these cases. Third, CBDT does not make any effort to liquidate cases pending even under its own jurisdiction in which Rs 3.74 lakh crore is locked up. Fourth, CBDT loses more than 70% of the cases brought against it reflecting the dubious nature of its officers' initial assessment.        Fifth, the number of transfer pricing cases, which were virtually non-existent in the 1990s have risen from 1,061 in 2004-05 to 2,638 in 2011-12. Sixth, CBDT's aggressive stance towards foreign investors is reflected in the sharp hike in the number of transfer pricing cases in which its officers have increased the tax demand. Such 'adjusted cases' rose from 23% of the total in 2004-05 to 52%, with an additional demand of Rs 44,531 crore.        Finally, CBDT does not accept courts' decisions against its orders and with frightening regularity amends tax laws with retrospective effect. This not only renders the entire process of appeals and judicial review virtually infructuous, it also creates huge uncertainty for investors. The upshot is a strong negative perception about India as an investment destination. This is not good for Make in India.	Central Board of Direct Taxes loses more than 70% of the cases brought against it reflecting the dubious nature of its officers' initial assessment        CBDT's systematic action against both foreign and domestic investors could well be a result of a strong bias among IT officers, who see big business as flouting all laws and fleecing the exchequer. This has led CBDT to make several wrong moves. In the case of Vodafone, CBDT lost its case in the Supreme Court only for the law to be changed retrospectively. It has recently lost its case against Shell as well.        The Nokia case is still sub judice but CBDT refuses to lift its freeze on the company's plant that will allow the facility to be sold and the receipts to be put in an escrow account to be appropriated by either CBDT or the company, dependent on judicial outcome. Honda Cars India Limited have been served tax correction notices in 2013 and 2014 for the years 2005, 2008 and 2009 amounting to a demand of Rs 2,229 crore! All these are premised upon a contentious interpretation of 'permanent establishment' that is strongly contested not only by Honda but also by the Japanese government.        CBDT's relatively junior officers who make the initial tax demands are apparently a law unto themselves. This cannot generate confidence among foreign investors who the PM is trying to attract to India.	For domestic investors and indeed for common taxpayers like you and me CBDT is a virtual terror. The threat that 'we will get the income tax department after you' sends a shiver down the spine of virtually the entire business community except a few well heeled and better connected. The political class has made it worse by often using the department to settle scores with political rivals, upright bureaucrats or even an investigating journalist. Remember the witchhunt against those even remotely connected with the sting operations against a former defence minister?        CBDT refuses to treat SEZs more sympathetically and remove MAT despite repeated representations by the commerce department. In China, Korea, Taiwan, Ireland and Mexico, SEZs have contributed handsomely to manufacturing and exports. In India they have become a complete failure due to some unscrupulous land grabbers and CDBT's obdurate opposition on the pretext of revenue loss.        Income tax raids are worse than nightmares. I have seen a number of aged businessmen weep openly while recounting their experiences. Consequently, Indian businessmen are now moving their investments to other countries. Not good for Make in India.        The finance minister should be keenly aware of these issues. He has ensured that no fresh cases have risen since May 2014. But there are about a dozen or so issues that this government has inherited, which need to be urgently addressed and resolved. The need of the hour is to perhaps set up a high powered task force, which can recommend steps to resolve these issues in time for the next budget. That will be a real contribution to the PM's Make in India programme. Author is a Senior Fellow at the Centre for Policy Research and Founder Director of Pahle IndiaFoundation. The most recent book is Exploding Aspirations.