Dr. Shome: Taxpayer = “customer”, DTC needs “sharpening”
The last couple of years have been eventful on the tax policy and administration front. From GAAR to retro amendments, DTC/GST and big ticket multi-billion dollar tax litigations, India has made global headlines. The man in the thick of all the action; who has on more than one occasion been assigned the task of dousing the fire and finding out a middle path, acceptable to both taxpayers and Revenue, has been Dr. Parthasarathi Shome, Advisor to the Finance Minister. In a recently released book – ‘Indian Tax Administration – A Dialogue’ edited by Dr. Shome, he has discussed many bold ideas to reform Indian tax administration with the ultimate objective of treating the taxpayer as a ‘customer.’
Mukesh Butani, Managing Partner of BMR Legal and Taxsutra Editor Arun Giri caught up with Dr. Shome for his most extensive interview till date, in which he opens up on his views on all hot button tax policy and tax administration issues.
Interview with Dr. Shome
Arun Giri: Dr. Shome the one thing that stands out in the book – Indian Tax Administration, A Dialogue, is this paragraph where you write: ” It is fundamentally about moving to a more open and trusting relationship between Tax Administrations (TAs) and their ‘customers’ or ‘stakeholders’ with the objective of achieving greater voluntary tax compliance by taxpayers.“ Dr. Shome, if you could elaborate on some of these fundamental points.
Dr. Shome: I think you have hit at the crux of modern tax administration where a taxpayer is not called ‘taxpayer’ anymore. A taxpayer is perceived as a stakeholder in the system of contributing to the fisc and therefore he is a stakeholder in the system. The second thing is that from a tax administration’s point of view the stakeholder then becomes a ‘customer’ , just like in your firm your clients are your customers whom your serve. Therefore in that manner tax administration has to treat taxpayer as customer and forget that the person is really a taxpayer. Tax collection therefore should come almost automotically except for various cases of tax evasion and since it is coming automatically it has to reflect voluntary tax compliance. In other words, in a 3 step process, it is as if this kind of relationship of treating taxpayer as a stakeholder and then from administration’s point of view, treating them as customers and those customers are buying the product of the fisc and contributing and voluntarily complying, that is the ideal goal. Ofcourse there are in the fringes, tax evasion and tools have to be used targeted to obviate tax evasion. So this is a modern concept of tax administration.
Arun Giri: In the book you also argue that TAs need to move beyond premise that everyone is naturally inclined to avoid paying taxes. From where is your vision of a ‘modern’ TA inspired from? Any jurisdiction or country where a taxpayer is treated as a ‘customer’ ?
Dr. Shome: There are several such economies.. infact much of Europe has moved in that direction. This customer focus you will very much find in Netherlands, Scandinavia, New Zealand, several countries in Latin America like Columbia, Brazil. South Africa is now moving on that mode. So it is not at all unusual to view taxpayers as customers. At the same time in my deliberations and discussions with taxpayers i have observed over the years that a vast majority of taxpayers are willing contributors to the fisc. What they don’t like are 3 things: Risk, Uncertainty and Poor treatment. Now the poor treatment of TAs is something that they really fear. Second is the uncertainty since they dont know to interpret the law, how the law will change, will their rational production decisions look meaningless? Therefore will the TA and tax law imply that they are taking risks that they cannot assess today? So those are the 3 aspects that taxpayers do not like at all. Even by observing and surveys that have been conducted in other countries you see that the voluntary compliance mode is preferred by the vast majority of taxpayers.
Mukesh Butani: Dr. Shome, delving a bit deeper.. there are 4 themes that are emerging not only from your book but also from various forums where you speak..
1. Desire to improve Large Taxpayer Unit (LTU) initiative.
2. Ease of tax compliance, particularly withholding tax.
3. Improving the functional efficiency of Central Processing Unit .
4. How do we make intelligent use of data that we have collected from IT system?
What are your views on some of these aspects?
Dr. Shome: The LTU is really a ‘facilitator’ for large taxpayers. In many countries it is utilised in an almost automatic fashion. i.e. the TA declares to the tax payer that we shall organise ourselves by segmenting taxpayers according to the size of tax that they pay. Therefore the large taxpayers are in one segment, the medium taxpayers in another segment and small taxpayers in another. In our country we haven’t taken that route as such but the route we have taken is to say that large taxpayers as we will define, i.e. Rs. 10crores advance tax payment or Rs. 5cr excise duty or Rs. 5 cr service tax payment; they qualify qualify to opt into LTU and they can pay all taxes in the same window. Then refunds and clarification of doubts, access to Commissioners and Chief Commissioners etc is automatic. It is an open-door policy. From time to time discussion of tax policies emerge and therefore the whole atmosphere is voluntary compliance oriented. In India it is optional (to avail LTU ) while in other countries it is how naturally the TA us organising itself.
The other aspect where we have proceeded to world class levels is the Central Processing Centre (CPC) in Bengaluru and now there is a CPC for TDS which is at Vaishali, Delhi. What you have at Bengaluru CPC is really a PPP (Public – Private Partnership ). One private service provider is processing the returns, generating the refunds etc. Another one is accumulating the data and data mining and the whole process is top end use of Information Technology and the whole processing of data has become IT oriented and integrated with TA. The taxpayer files return electronically. That information goes centrally to CPC. Electronically the tax deductor of TDS sends the money into the banking system, which in turn informs the CPC that this is the amount of money that has come in. So it is an automatic cross check between CPC and banking system and once the tax deductor whoh has deducted the money and put in the amount into the banking system, can download from the system the certificate of tax deduction at source, with which the deductee can now take TDS. Now what i understand is that this information is also available to the monitor/desktop of Assessing Officer. So you literally have a triangular or four cornered link between the bank, the CPC, deductor, deductee and Assessing Officer.
So, this system has taken some time to mature and to be put in place, but it working very well. And there are issues under margin like it has taken some time for the assessing officer to be able to access this information but now it is working very closely. Plus, the interesting thing is, the deductee, once he has this amount deducted, and, suppose, he’s waiting to get the certificate, he can actually then go, as you know this 26AS, which is where he sees how much has been deducted and so and so forth and the tax deductor after having sent his money, then actually he can download the two forms 16 and 16A, which enables him to give a TDS certificate to the deductee, the first one for salary and the other one for non-salary sources of income on which he has done TDS. So the deductee should have 16 and 16A forms when he is filing the return and once he has that then the assessing officer will allow that thing. But now the good thing is that the assessing officer himself can see that on the monitor and do it, before that was not necessarily happening and there were kind of slips between the two. But now all of that, I understand, by and large is all resolved. So, this process generates a whole wealth of data. Who’s paying the salary, where, and then whether the tax deductor had deducted and then after deduction has he paid to the banking system, so on and so forth. The use of this data or data mining can help generate studies and analysis of segmentation of taxpayers. That is you can then see these taxpayers, overall income is so much, how much is the TDS, or the behaviour of the deductor. So, then you can segment taxpayers by, let’s say, saying voluntarily compliant taxpayers, those who are sitting on the fence, so to speak, those who have volatile income, those who need help, typically those who have many many, let’s say, bank accounts, but are not able to combine them, for example, typically widows may have been left with many bank accounts by their deceased husband. Similarly, complex individuals who are, let’s say, typically actors, athletes and so on who have various sources of income, how do they combine. And those who are evaders. And so, you can, just by looking at this kind of tax payment, sources of taxes of individuals, you can classify them by statistical analysis where you can see how the taxpayers are clustered in different forms.
Arun Giri: Dr. Shome, very interestingly, what you are saying, lends me to my next point, in the book you say, the CBDT needs more analysts.. you say the CBDT has 20 analysts as against 400 in UK. But you already do have the AIR, i.e. the annual information return and so many other data tools that were revealed by the current Finance Minister two years ago, that was supposed to help the tax authority, the assessing officer, to get exactly the sort of data mining that you were referring to. Have the assessing officers have not been able to make the best use of the data? Or what is it?
Dr. Shome: AIR, the 6 components, that is the third party giving the tax authorities information because these transactions cannot be carried out without the PAN number. So, once the third party gets this information, because they are transacting with the taxpayer, they have automatically send to the tax authorities. Now, in order to select your cases for scrutiny, this AIR information is used, because an algorithm which is the combination of these 6 components, together help select who will be scrutinised. There is no manual judgement on income tax scrutiny anymore, it is entirely algorithm based. So this is they major advancement of the use of AIR. Therefore, the movement in scrutiny selection has moved forward by leaps and bounds, I would say that, yes sometimes you might have, like in earlier days, erroneous pickings for scrutiny, for example, one criterion had been that you would pick for scrutiny an assessee based on his investment in mutual funds. So, it didn’t say, net investments, because if you have a typical financial adviser, he would come and ask you to invest here and next he would say now let’s shift here and so you take out and invest. So, the algorithm allows for the grossing up, where as the middle class retired bureaucrat may have been taking out money, following a young financial adviser etc. so net correct investment of one crore may appear just taking the gross amount as let’s say twenty crores and therefore, it could be picked up for scrutiny based on the 20 crores. So that took some time, there were certain cases that showed up as gross investment being used against net investment. From what I understand, it has been corrected, and so such people will not be facing scrutiny. However, once corrected you can see that it is entirely based on this kind of randomized process. As far as I know, no one knows this algorithm except the few youngsters who must have put in this algorithm. So it is working very very well. However, the second part that I was saying, that how do you then use this AIR again to study taxpayers. If, for example, you see that those who are investing in mutual funds and so on and so forth etc, that group, even through scrutiny, it is found that the adjustments are very low. Then you know that mutual fund category is not evading prone. So you have to do that kind of analysis and without that kind of analysis all you are doing is you are using the algorithm to select scrutiny cases, but the outcome of the scrutiny cases also have to be analysed and that is the kind of analysis that I think we have to do. That is the kind of analysis modern tax administrations do regularly. And you cannot do it with very thin human resources, you need to have specialists and allow specialisms to grow and I think we have to go in that direction as there is more and more complexity in our sources of income, in our tax administrations and we will also evolve in that direction, hopefully.
Mukesh Butani: On the overall organisation structure there is a thinking that several functions within the CBDT and CBEC are being duplicated and I know you also have been advocating in your writings not a full fledged merger but a collapsing of the functions so that it improves the efficiency of the overall administration. The second important thing that you have been talking about is a inherent conflict that exists today between the tax gatherer and the tax policy maker and I know you have recommended that we should have tax economists who should be responsible for policy. What are your thoughts on both these aspects because these two critical aspects you know are the core of any kind of tax reforms. You know, if we are not able to make progress on these two then rest of the things are not going to be an easy task.
Dr. Shome: Let’s start from the small item of the large taxpayer unit. There, the large taxpayer unit today is giving the benefit to that large taxpayer because that large taxpayer is able to pay all taxes in the same window, refunds from both sides are coming very promptly, so on and so forth, the environment is great. But, the tax administration also has to get some benefit. And that benefit is that there has to be synergy and a frame work for exchange of information between CBEC and CBDT for the same taxpayer. For example, excise tax is paid today, corporate tax is paid next year and assessments happen following year, so by that time there should be quite a lot of information available from the excise side the customs side the service tax side so on and so forth, though customs are at the moment not covered in LTUs, but excise and customs, a lot of data is available. So there is a huge amount of cross checking and cross analysis that can be done. And while large taxpayers, we would expect not to be evasion prone, but, some adjustments some information can be exchanged, you know, we are seeing this kind of anomaly, how would you explain it etc. So, I think that synergy between the two departments is very very essential and then when we come down from the top of the ice berg of LTUs to all other taxpayers, you can then imagine the amount of information that is common and needed by both sides. And again, many many tax administrations today have moved in that direction, for example, excises or value added tax, corporate income tax, they are all called business taxes and these taxes are gathered from the businesses by the same administrative frame work. So a team will have a VAT expert, income tax expert, typically a trade expert who understands that particular trade in which that enterprise belongs and there could be a customer relations manager, so all four will be deliberating with the CFOs group in the enterprise in the particular sector. So it is not very unique today in the rest of the world and we are, very slowly, appear to be taking steps in the direction of the full exchange of information. But, we cannot maximize the advantage of the information that we have and that we are gathering more and more, unless that exchange of information takes place and is established in the frame work, not just informally.
Mukesh Butani: and the second aspect? The role of tax policy makers vs. the role of tax administration.
Dr. Shome: Tax policy today in global context and tax administration, there are various steps as I see. The steps, first, tax policy as concept and the implication of tax structure and tax policy on the economy on investment and so on so forth, in a global context, when also capital is very mobile, this is the first step, how tax policy fits into the macro economy and on this the distortions caused by certain taxes and not by others the literature has moves in leaps and bounds and so immense that we cannot ignore it and that is the tax economics or tax economist that I recommended. Once that is decided, that is then transformed into the legislation and that tax policy structure as conceived from the point of view of its impact on economy, growth, productivity and so on, its distribution effects, equity effects, efficiency effects, revenue effects, macroeconomic effects under stabilization of the economy, all of these things comprise that. The next thing then is how you transform that into law. And that is sometimes called, let’s say, tax policy, but actually it is one step removed from the real tax policy making. And, once it is put in legal form, then you have the tax administrator and tax administrator is interpreting the law and implementing it and collecting tax but that is the fourth part, the collecting. But, this is the interpretation of that law, just as in the private sector, it is no more the productive sector, it is advisory sector who is interpreting the law for the productive sector. So, that is the third stage. And then finally it is the collection of the law, the disputes which come because of the collection. So that is the part of collection etc. but, ramifications of that, where the judiciary gets it, that is the fourth. So, you have the economists, then those who write the legislation, then you have administrators and advisers, and then you have the judiciary, who are saying whether this whole process was right or wrong and we better abide by it.
Mr. Butani: Sir, the last part, there is judiciary even within the tax administration.
Dr. Shome: Correct!
Mukesh Butani: So I am excluding the quasi-judiciary and the courts. But the efficacy of this part of judiciary which is the part of tax administration has come under question in the recent past to how efficient are they. For example, when I started my career, 28years back, 80% of the decisions with the first administrator which is Commisioner of Appeals, were held in favour of the taxpayer. Today, I am not even sure if 20% are held in favour of the taxpayer. So there is a big question being asked on the efficacy of the judiciary which is housed within the tax administration.
Arun Giri: The effect, I would want to add to that, one of the chapters in the book on dispute resolution calls for scraping of post of CIT appeals.
Dr. Shome: As I said right at the beginning, I didn’t change the opinion or finding of any particular researcher.
Mukesh Butani: And Sir also the question is that over the years too many of these judicial forums within the administration have come about. You know we had the settlement commission, we always had commissioner of appeal, in good old days we had inspecting assistant commissioner concept where some times the officer had to go to his senior officer and seek his blessing. And now of course, the dispute resolution panel. So we have no dearth of agencies to deal with within the administration for tax disputes. But, how effective are we, if something so many taxpayers are questioning.
Dr. Shome: No, today this is probably the crux of the matter. One of our major lacunae today is the speed with which we resolve. And it begins right at the administrative point. Like when I said in other systems, those systems are trying to resolve cases through interaction, though face to face decisions, you know, changes, etc. so litigation is kind of the last resort. Or for example adjustments, there are few and far between, so they don’t come up as adjustments or demand because they already have been resolved at some point etc. so in our case what is effectively happening is that you have many many adjustments because that is considered to be safety valve of the administration. We also have CAG and there is some kind of fear factor that what view the CAG will take. So, sometimes, the understanding between the two parties may be better to go to appeal. I truly believe that we have to move away from that. Not just move away, we have to find solutions how we can move away from that and come closer to practices that have been achieved in other setups, other tax administrations and tax payers. And similarly, there are cases I can tell you that I have seen where we have tried from governments side to generate a, let’s say, a discussion process when something is going on. But there is a deadline so either the party, the assessee goes and appeal anyway, or the authority will say that deadline is coming and I have to generate a demand and will generate the demand anyway. So we have to look at those things also, that why, despite the fact that there’s something going on do we need to have all those kind of deadlines which kind of stop the process. On the other hand my observation is also that the settlement commission should be there to settle very quickly, I mean you have seen other countries where they come and settle .. yes or no .. thank you. But here each case in itself becomes a file and members may feel like we need the information, we just can’t settle like that. But we have to remember the original objectives of these things. And so we do need to move away, from this time element which really extends despite all these various instruments and tools that we have been able to install. DRP ITAT etc. I mean you name it, from the judiciary to combination of judiciary and administration then pure administration and so on. So, I really feel that this can come only with some kind of time limits given to each of these bodies that you must; this is for settling, so you must settle within this period. You just can’t treat it as a new case. So we really have to ring fences all these various avenues for solution in terms of time that is given to them. That is to be thought of very carefully, what is the relevant time.
Arun Giri: if I could you know just summarize the three main tax administrative reforms you have called for in the book – Redesigning of LTUs, amalgamate the income tax and indirect tax branches and structure the tax department according to functions. If you could just spend a minute on each of these things?
Dr. Shome: On LTUs my view is that we have to bring in many many more large taxpayers, you know otherwise by the criteria that I indicated the 10 crore income tax plan etc etc. there are many more eligible taxpayers, so can we think of re-organising the tax structure and, have to discuss this of course with my commission members, in such a way that automatically we can think of organising the tax administration in such a way by segmenting the size of tax payers. So larger taxpayers automatically get slightly different treatment and then you can focus very clearly on the smaller taxpayers bringing in more into the taxpayer base but that can also be done by specialised functions and experiences. So what I mean by that on the LTUs is that can we organise our structure, of administration in such way that the larger taxpayers are naturally treated in that kind of a manner, rather than actively telling them will you join in so. So that’s one thing. Now, by amalgamate I mean, like I said, most tax administrations today business taxes are considered to be collectible from businesses. So it makes a lot of sense to think of all the taxes that a business pays together. And whether you amalgamate like many tax administrations have done or whether you amalgamate lets say business taxes for administrative purposes and research purposes and analytical purposes, to me its the same thing.. in the sense you can also do the latter and to a great extent achieve the kind of synergy from the two branches. But the third thing, which is also important is the functional and sectoral divisions. So, you see there is so much specialisation, today, in the way a particular Industrial or service sector operates. For example, oil and gas, cannot be compared as a sector with life insurance. The whole kind of way they operate, the whole way their profit and loss accounts of insurance compnies are set up viz-a-viz oil and gas sector. You can have banking, insurance, oil and gas, telecom and telegraph, you name it and they are all different. So you need specialisation within the tax administration who know these sectors in great detail. So you automatically divide your large business services or  sectoral focus. So you can think of them as horizontally divided sectors and then in the middle you have the stem like a tree and there you have different functions, you have assessment, audit, analysis, debt, vigilance, intelligence, risk analysis, you have to have IT which is major driver, then the legal branch, then you have all kind of website formation which is IT used in a different way, your IT customer complex centres, you can call it customer relations; so those are the functions, and usually what happens is these sectoral departments actually buy the services of the functional departments so the resources are given to different sectors, some resources are given to the functional sectors, but the sectoral divisions or departments have to buy the services from the functional department. So it is a pure flow of funds kind of an arrangement.
Arun Giri: But how would it work Dr. Shome, when you have so many transfers, that Is in the book so passionately one of the authors say that you must put an end to frequent transfers and it goes on to say and if could actually read it from here where he points out that it takes at least 10 years for a person to be considered knowledgeable in a particular industry.. pointing out that Australia, Canada, UK, USA follow the policy of long tenures to build expertise. And on India the author says “ the tax administrators have lost its credibility by ignoring and not accommodating a person’s willingness aptitude and expertise of transferring and posting of tax personnel” … “it is time to drop the colonial policy of rotational transfer and allow willing tax personnel to enhance their knowledge”.
Dr. Shome: Now the issue is very very important and relevant, for example, in transfer pricing international taxation, I believe it does take about 10 years, to become a specialist. For example, systems, also when you are processing and do that you do need tremendous specialisation. One type of specialisation is that of the forms, how do you change the software to do new forms and so on and of course CPC is doing a marvellous job in designing forms. Some of it has been given to these young IT specialists etc so some specialisation is already happening but not comprehensively, there are other forms that are not yet so electronically oriented but there is also digi assistance, there again I think specialisation is very very important. And many are there areas for example intelligence, you need for intelligence certain kind of experience and people go from the departments on deputation to some other govt. departments so for intelligence I think it would be very complimentary for them to experience all sorts of deputation how intelligence is gathered in some other departments. They are already exchanging information to some extent etc etc. but that may not be sufficient with specialisation. So I think that while revenue services are an all India service but in brazil which is two and a half times our geographical size, they also have developed acute specialisation and at the same time they have maintained certain regional kind of area because of large sizes so they have set up those organisations by region with allowing a specialisation and then like a pyramid build up the whole process which results ultimately in the Brazilia administration. So I think that can be done in India and it has to be done otherwise we cant build up the kind of specialisation that is needed.
Mukesh Butani: Sir let me come to GST and DTC. GST is something that you started even in your earlier regime. Leaving aside the political mandate part of it, the question that large taxpayers have is the level of preparedness of the administration and the taxpayer for GST. And what are your views specifically on that because I know that thing is again on the top of your agenda.
Dr. Shome: Frankly, the first GST report that I co-convened with the secretary of the empowered committee of the state ministers..that was submitted to finance minister and the empowered committee at the end of 2007. So, that was something that already we had discussed with the empowered committee and it looked quite close to the ideal GST that we can kind of put together and introduce in a complex federal country like ours and it will move too much away from VAT concept and the states seemed happy. Now, in the meanwhile I really feel what has happened is that a lot of accommodation has been made to both sides and however most of them one can live with for example, instead of having within the states and the centre two rates, a lower rate and a higher rate, now banks had to be accommodated, and then exemptions essential, perhaps, then in the case of depletable resources like petroleum originally it was out where as all GST models in world over it is always in and then if more revenue is necessary then an additional turnover tax over and above the GST rate is put on petroleum p[products. So that was not inside, but after much deliberation, that has been dropped in and it is by enlarge it is accepted by empowered committee, so that is in the GST base. Then you look at tobacco, which is basically in the area of the Centre, the Centre has agreed to retain it in the GST base, but alcoholic products which is in the hands of the states, they are not being to bring it in. But the idea is you bring them into GST base, allow input tax credit and then you have a part which is on the basis of turnover. So many things and most things have come in. Then entry tax, in fact the parliamentary committee on finance has also suggested that entry tax should come in and octroi but States are resisting. So the overall structure is more or less fine. To me, however, the issue, as you said politics aside, the issue of compensation etc has to be resolved. But what is remaining in my thinking are two things, one is the IT, that is within each state the GST, have they thought of appropriate e-information technology needs. And the second part of the same point is inter-state trade, what model will they use, will the Centre be the clearing house or will the banking system will be the clearing house, because if Centre is the clearing house then some, lets say, as money is being collected and given somewhere else there will be a small kitty at the level of the Centre and then the States will obviously have grudges to as to why the Centre is using its money. The banking system, probably wouldn’t use it, the banking system needs some service charges so that could come from that flush funds. That is one part. The second part, is the issue of rules, for example, if u look at many service tax rules today, the nexus between input output to be established, the place of supply, cases of insurance or intermediate services, those, I think, are absolutely essential to be rationalised, before an appropriate GST applicable both in the chain of the states and the change of the centre can be introduced so that there is a clear differential benefit to business, because GST is not just input-output credit, it is also how you apply them and what are the rules for the implementation of it in terms input tax credit, allowance of, lets say, capital goods credit. So, I think from businesses’ point of view, this is most important. And I don’t think that work has been completed by either govt. or businesses at this point. However, that does not mean that constitutional amendment can’t go through, because constitutional amendment is a thing by itself, so once that framework is introduced, other things can fall into place and they should fall into place. That’s what I believe.
Arun Giri: Any time line you thought? Because this has been expected by the industry for the last few years. Everyone says it will be path breaking. Now there is a lot of cynicism whether this will come through and in what form, there is a talk of duel GST…
Dr. Shome: One is parallel GST input output credit within the states; they will tax goods and services.
Arun Giri: But duel GST rates, one state GST, one Central GST.
Dr. Shome: … Because the model itself is like that. The centre will have its rate structure and states will have its rates structure but that won’t matter because input output credit system will be self contained within the State GST and Central GST respectively. So that won’t matter.
Mukesh Butani: Sir the likelihood of DTC?
Dr. Shome: DTC also the work is going on very intensively. Now we have received comments from a number of ministries. So, Finance Minister is considering those comments. And we are seeing what can be accommodated keeping the overall framework in mind. And he’s now literally in the thick of it and discussing with us what needs to be done. Hopefully this will be completed and if you honestly ask me, I think, the political economy aside, it should be ready for the winter session, but the political masters have to decide that ultimately. From a technical point of view and for a technical person like me, I am really keeping my fingers crossed to see what happens.
Mukesh Butani: Though there is a somewhat a joke about it that within the lawmakers or political masters that DTC was accorded a step-brotherly treatment compared to Companies Act.
Shome: Well, the Companies act also they have been working on for a long time, but the direct tax code, I think, has gone through various incarnations. So that is another matter. So we are…there was originally we finished the work in 2008 then it came out in 2009, then it was discussed in 2010, that went to the Finance committee, now it is the final aspect of it..So if you really see and the structure of each of those is significantly varigated. Let me put it that way.
Mukesh Butani: The parallels with the Companies Act is that expectations have built-up that if the Companies Act went through, the DTC should also
Arun Giri: But Dr. Shome, on a philosophical note, you have some top tax consultants in the country, tax professionals, who say that now that so many of those amendments which were supposed to come in DTC have already come in the Finance bill in the last two years, do we really need to unsettle a settled law like Income Tax Act and bring in a fresh Direct Tax Code.? Do we really need a fresh Direct tax code?
Dr. Shome: No, I think we need new Direct tax code. The question you are asking is will the Direct tax code that will be proposed, will that suffice? Will that reflect what we need…
Mukesh Butani: Or will that unsettle the past principles?
Dr. Shome: I think, it will still be a significant improvement in terms of reducing complexities and in terms of interpretations. Even though some Chartered Accountant friends of mine have said (that) we are all used to that, why do we need it Dr. Shome? But I think that fundamental treatments of certain sources of income. They will be simplified. So that means interpretations will be simplified. Further, and ofcourse the changes that have been incorporated will come for the, but on the other hand certain changes were made in 2010, 2011 and 2012 which might be modified hopefully for the better. And so I think if it comes through, it will certainly be a significant set forward but I also think that further changes would be necessary to consolidate the gains of the chain system fully. I think that work will still remain. But I also have concluded that you cannot always gain everything. You know there is a phrase there is an idiom in English which says ‘If you aim at the stars, you reach the tree top’. So we are reaching much above the tree top but the aim was complete optimal, you aim at the stars.. but we are reaching the planet size. (smiles)
Arun Giri: On GAAR. Painstaking effort was made by you, your committee, gave a lot of recommendations, tried to put in checks and balances, given many examples on how GAAR should be implemented and a lot of effort has gone into it. Are you happy with the final GAAR legislation and rules that have been put in place, do you think that that should sooth the fears of the industry who feel that after transfer pricing this could be the next minefield of litigation ?
Dr. Shome: See, for transfer pricing also there are safe harbor rules, etc. and things are becoming better already, now with GAAR I have been a chairman of an independent committee so I abide by everything that the committee has recommended and only complete acceptance of everything would satisfy me fully. So it is by definition, I hold my independent views. Now will it sooth investors, and reduce uncertainty, obviate any kind of roving enquiry, I feel yes. Because you see that the onus is now at the administration. You see that the main motivation has to be tax avoidance. Many of these things have been incorporated which will certainly improve the overall atmosphere of reducing uncertainty. There is no doubt about it. At the same time yes I am a little disappointed that all those examples have not been taken on, hopefully it might still be in terms of you know.. I would hope in some kind of circular, or guidance to Assessing Officers. So the more we guidance for Assessing officers to be able to implement this kind of thing all the better, because there are instances, in the Indian tax administration we have given tremendous powers and responsibilities to relatively low levels for carrying out assessments, for carrying out transfer pricing calculations, and similarly under GAAR this same thing will happen, and I feel that the more clarity that is provided to them from the administration’s top levels it will be better, rather than thinking (that) we will keep on adding from experience, because that coordination I have not yet encountered in very significant manner. So I would have certainly as Chairman of that Committee and reflecting also the views of the other members, senior members of the committee, I feel that that was an error for not taking up…and if they had any questions about certain examples, they could have asked that. But I am very very happy as to the number of recommendations that the committee which administration has accepted , which I think will clearly reduce the uncertainty.
Arun Giri: On BEPS, Dr. Shome you had Mr. Pascal Amans, OECD Tax Policy Director who was in India a couple of days ago. Base Erosion and Profit shifting has now not only become OECD or a G8 project but the G20 project and India is involved in it and many Indian Revenue Officers are saying that their stand has been vindicated..this is what we always said that you must go to source based taxation and every country must get its share. Somewhere, Dr. Shome, you feel that all countries, because of the current economic situation, the recessionary environment, everyone is challenged for Revenues.. so all the jurisdictions are moving towards protection of their own tax base.
Dr. Shome: There are two things Arun, one is Source based taxation or not. The other one is uncertainty. So India has always had source based taxation, you know. We have always gone for the source principle as opposed to residence principle, and that is a fine objective and point of selection for an emerging economy. Because if the capital is coming from outside and that capital is being utilized here and that is generating some income which is the source country then we should have a right to tax it and we have always followed this model which is relying on UN model. And we have always taken a little bit of distance from the OECD model, and their point of view is also understandable because they were the capital exporters. Now infact increasingly there is a challenge because we also have many capital exporters today. However, we have always maintained the source principle of taxation (and) we have never questioned that. The issue is, I think, source principle or residence principle, can you be certain about what you are doing and what your tax framework is, and that you are saying that this is our tax framework and this is not changing retrospectively. I think that the retrospective issue is what muddied the waters about source, etc. So yes we have been correct.. we have been following source based principle but can you go back under certain interpretations of judiciary, etc. and then change the law retrospectively.. I personally don’t think that is a very good idea. So I believe in prospective taxation. I have seen that in country like Brazil where I have worked intensively, I have also seen in Sweden in particular that had really prohibited retrospective taxation in their constitution, and so that gives rise to a lot of certainty in terms of Investments and when we are thinking of Investors.
Arun Giri: So you think, the BEPS project in the long-term will give rise to certainty? You think countries or the industry or the multinational giants will have more clarity for e.g. Apple which is probably selling its product in 100 countries..You think they will have a clarity on how much they want to pay tax in each country?
Dr. Shome: For e.g. the Parliament Committee in the UK has her majesty’s Revenue and Customs to come and explain why all these companies have not paid any tax here-there.. I mean that is okay, however I must also say that while we are kind of.. we have always supported and used source based taxation, in other countries the capital exporting countries that are coming in with, who have followed residence principle suddenly now moved categorically towards source-base I am very glad that India is one of steering committee members of BEPS, so that India can ensure that there is no tax base erosion in an international context for India. So you know, now everyone is doing the right thing, we have to also protect our tax-base appropriately.
Arun Giri: Last 2 Questions. One on the big ticket tax disputes. You have multi-billion dollar tax disputes and with the transfer pricing adjustments you will have many more reaching courts very soon. The MNCs say that this creating a sort of fear psychosis, this is preventing investment; this is affecting FDI into India. Whats your personal take on these big ticket tax litigations, how do we avoid them and do you really feel that the APAs and the Safe Harbor, the R&D Circulars .. in your interaction with all the foreign investors over the last few months, do you think that these measures have actually instilled the confidence necessary?
Dr. Shome: I think these measures will increase the confidence factor..will improve the confidence factor. But at the same time we have to ensure that once these guidelines are given they are interpreted rightly in the field, people are actually trained, and that as a result, the investors are assured the certainty that this is what the structure is and we follow that. As long as we are clear about our source principle and how we are going to do our safe harbor, how we are going to calculate or minimize the profit shifting whether you are going to use cost plus, or you know profit sharing, and we are clear about these principles, then we are you know safe as far as investment is concerned. But we can’t keep changing. We have to give proper guidelines to these companies and you are seeing that these companies are facing some similar challenges in some other jurisdictions also. So I think the main issue is uncertainty, rather than the quantum of taxation as far as we are concerned. I mean, we should not receive any less than our appropriate share. But we cannot change retrospectively the level-playing field in order to then correct for the revenue loss. That, I think, I cannot accept as a professional in this area.
Arun Giri: Again on a philosophical level. Dr. Shome, is it a complete paradox that one the one hand you have revenue collection target, on the other hand you say you want a friendly relationship between taxpayer and tax administration Don’t you think that there is a dichotomy?
Dr. Shome: No I don’t think, because I’ll tell you, one thing is your revenue target is going to be achievable only if you have a customer focus. Otherwise you can extort for some time but you cannot have a smoothly running administration in the long-term..in medium term also, in terms of revenue collection. The other thing is I believe, and what I’ve seen in most of the other countries also, they have moved away from the concept of a revenue target but they use a concept of a tax-gap minimization. So revenue target is actually a moving target reflecting the cyclicity of economy. When you are in the up-cycle, your revenue target moves up. So ever quarter at least if not every week, in some of the advanced economies, your revenue what you will get at the end of the year you are projecting that, that is the administration itself. So it is not necessarily something that, you know, you call a target. Target is as that is happening you are collecting something and there is a difference and that difference is the tax-gap can be minimized. In other words, you have a moving target and can we reach the moving target?!. So I think that it is not inconsistent in general we should be using a moving revenue target and we should be minimizing the tax gap, and we can do all that best with a customer focus.
Arun Giri: Last Question. We are winding down the term of this government. Elections are now 5/6 months away. How has been your experience Dr. Shome working in tax policy so extensively in the middle of some of the most exciting and challenging tax issues and so many controversies, so many new things that happened in terms of legislation, retro amendment, GAAR, BEPS. You have been in the thick of it..hows been the experience?
Dr. Shome: No, I must say it is ever challenging. It doesn’t cease to be challenging. Every day new things appear. And so the forum that has come up every week, I am meeting two sectors for easing procedures.
Arun Giri: And how is it going Dr. Shome?
Dr. Shome: Its going very well. We have completed about 12 sectors over two months. Some sectors have met more than once because Financial sector and so on and so forth, and what we have done is when they make their representations in a format that I have given them, I first discuss all that internally and then I have a weekly meeting with them every Wednesday for 2.5 hours, from the direct tax side to the indirect tax side, and then all those representations are divided into three. One, what we should be looking into or what the dept. should be looking into for possible modification, that is all procedures basically or interpretations of the law in terms of rules and regulations. What I feel that I explained to industry and representatives and nothing needs to be done, and the third is that we have asked them for some more information. Then I write down the guidance for the two Departments as to all this and the memo then goes to them, and they have to then come back and give their final views. They are also in the meetings, sitting there.. Once they send it back to me, then I’ll be sending very soon to Finance Minister the series of recommendations, and then lets see. Ultimately Finance Minister will have to decide.
Arun Giri: So it has been a fulfilling journey?
Dr. Shome: Yes. It is fulfilling because you know I have done a lot of work on tax policy side, and what I find fulfilling is actually to see its implementation. My struggle is to see that some of these ideas and concepts are implemented in a meaningful way.
Arun Giri & Mukesh Butani: Thank you so much for your time.