The document discusses recent trends in taxation around the world including economic underperformance, pressure on governments and corporations to mobilize resources, and strengthening of tax monitoring systems. It notes challenges for corporations from increased tax reforms, compliance requirements, and uncertainty. However, it also discusses opportunities for corporations to review business models, improve governance, and focus on fundamentals rather than tax arbitrage. Specific Indian tax reforms like GAAR, GST, and dispute resolution processes are analyzed, and recommendations are provided around standardized tax models, reducing tax rates, widening the tax base, and improving corporate compliance.

1. Tax Reforms – Opportunities and
Challenges
CII – CFO conference
7th
November 2014
R.Kannan
Hinduja Group
Views expressed are personal

2. Trends
• Economic Underperformance of countries across
the world.
• Underperformance of Companies around the
world.
• Pressure on mobilisation of resources by
Governments and Corporates.
• The solutions for overcoming the crisis in the
short term are still not visible and the ones
adopted by Governments and central banks are
not yielding the desired results.

3. Trends - contd
 Balance sheets of Countries /banks /corporates
are still under stress.
 Regulators around the world are looking for
innovative methods for mobilising resources
and identified direct tax is one of the sources
for shoring up their finances.
 Authorities across the world are strengthening
the monitoring systems to capture transactions
where the profit shifting takes place and putting
in systems to levy tax on profits relevant to the
domestic operations.

4. Challenges for corporates
 Corporates are already under stress.
 A performance of a corporate today is more influenced by
developments in the environment and a robust internal operation
does not guarantee a profitable operation.
 The new measures by government across the world is making the
tax planning exercise futile.
 The decision rules followed by authorities are introducing
uncertainty .
 The tax arbitrage available to make a business more competitive
is diminishing.
 The compliance requirements are becoming very stringent and
the knowledge about the new developments in taxation aspects
have to be updated on a continuous basis.
 The new regulatory developments are challenging the robustness
of present business models and not guarantee a profitable
operation.
 Even established principles of taxation are being challenged by
regulatory action and new rules which have a retrospective
effect.

5. Opportunities for Corporates
 The new developments force corproates to
review their present business models and
transform to sustainable , new , innovative
business models.
 Corporates are forced to adopt best Corporate
governance practices which leads to a
professional management of an enterprise.
 Develop a business based on fundamental
principles not based on tax arbitrage.
 Focus on Compliance aspects and develop
robust systems and procedures for
management of the enterprise.

6. Tax Morality
 It has been proven by research that profits
earned from tax paid transactions earn higher
returns on the capital.
 Investments incurred for saving tax result in
much lower productivity.
 Evasion of tax by a few has put pressure on
genuine transactions.
 There is a wide tax evasion in the informal and
SME sector which leads to lower tax base .
 This puts a heavy burden on those who pay tax
resulting in higher level of scrutiny and
additional pressure on corporates.

7. BEPS / GAAR
• There is a BEPS action plan to curb tax avoidance world wide.
• Standards were published for automatic exchange of information.
• There is expansive reporting requirements.
• Most of the countries have started reviewing the operations of
companies to ascertain the profits relating to home country
operations and want to tax them irrespective of where the
registered , head quarters of the country is located.
• Now countries are unilaterally applying GAAR and overriding tax
treaties.
• The countries which are losing court cases in GAAR related issues
are making the laws more stringent.

8. GAAR in India
 The initial version has been diluted.
 It has introduced tax uncertainty in the Indian
environment.
 It is likely to impact existing investment and
operating structures for companies.
 This will override all tax treaties and the business
models created based on such treaties will be tested.
 There is a wider power given to the authorities.
 There is no provision for providing relief to the
counter party.
 Like to lead to lot of litigations.
 The companies will be forced to adopt structures
which maximises the tax paid to be out of the ambit
of GAAR.

9. GST
 This is likely to widen the tax base.
 Exclusion of Liquor and Land will lead to higher rates
of taxation.
 This will significantly increase the tax collections
across India.
 Will lead to good audit trail, reduce revenue leakages
and reduce tax evasion.
 It will provide a good mechanism of cross verification
of transactions.
 Introduction of GST will be good for the enterprises
in the organised sector.
 The challenges will be to find a suitable system and
formula to ensure that the states will also benefit
from the new system.

10. Dispute Resolution
 Number of disputes are going up.
 There is a huge shortage of infrastructure and personnel in
government to resolve issues expeditiously.
 Number of cases pending before CIT ( A ) at the end of FY 12 –
231,000 cases with a value of Rs.244,000 cr.
 There are alternate channels available for dispute resolution but
they do not have the same effect as the ones resolved by official
channels.
 APA mechanism is good one but so far only few cases were
cleared and after May, the speed of clearances had come down.
 The pace of new appeals is going up very fast .
 Recent notable cases were relating to Transfer price, indirect
transfer of shares, mandatory income, closing provisions,
payments for tax withholding, Gift of shares and Royalty
payments.

11. Time taken by Appellate levels
• Supreme court – upto 8 years.
• High court – 5 years
• ITAT – 3 years.
• CIT – 4 years.
• AO – 1 to 2 years.

12. Way forward
 Government authorities had come across all
types of transactions for scrutiny.
 Based on the experience, identify 100 typical
transactions , create flow charts for tax impact
on such transactions and the method for
complying with such provisions.
 Progressively reduce the tax rates .
 Adopting the above models should not attract
any further scrutiny at a later stage.
 Share with all the tax authorities and
Corporates the models which could be a good
guide for tax planning. This will help in better
business and tax planning.

13. Way forward
 Investors invest in projects , new businesses based on
regulatory , tax , economic and other arbitrages which is
one of the main motivation for investment in new
projects.
 Removing the tax arbitrages will slow down investments.
Before implementing new provisions, the likely impact on
removal of arbitrage on capital investments and growth
of industry should be assessed.
 Focus more on widening the tax base than levying higher
taxes on the existing entities.
 Adopt global best practices .
 While using bench marks, it has to be recognised that in
an industry there are Leaders, followers and Laggards and
each has a different cost structure and Profit ratio. This
fact has to be recognised while looking at TP.

14. Way forward for corproates
 Give a very high focus on compliance.
 Create a separate department for compliance.
 Closely monitor the development in regulatory space and
constantly update the knowledge base.
 Develop immediate response to comply with the new
regulations.
 Work very closely with the Regulatory authorities to explain
the recent developments in the business models and how
these have implications for business competiveness and
profitability.
 In Many instances, the disputes arise due to poor
understanding of business models.

15. Thank you