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Budget 2022: Services Sector To Dispute Resolution - Tax Issues The Finance Minister Should Focus On

It ain't a 'wishlist'! Some doable tax changes finance minister can bring in Budget 2022.

<div class="paragraphs"><p>Finance Minister Nirmala Sitharaman. (Photographer: T. Narayan/Bloomberg)</p></div>
Finance Minister Nirmala Sitharaman. (Photographer: T. Narayan/Bloomberg)

The services sector accounts for over 54% of the economy. But, as the 2020-21 Economic Survey pointed out, the Covid-19 pandemic, the subsequent lockdown and social distancing measures have had a significant impact on the contact-intensive services sector, namely tourism, aviation and hospitality. During the first half of FY21, the services sector contracted by almost 16%.

Union Budget 2022 is unlikely to be about tax sops but what it can realistically do is acknowledge the contribution of the services sector to the economy, Sudhir Kapadia, national tax leader at EY, told BloombergQuint.

The extra heft that the government is seeing on the tax collection front can be utilised to bring the services sector on par with the manufacturing sector. The services sector is creating jobs—an indicator we struggle on month-on-month. So why not, with proper checks and balances, incentivise the services sector?”
Sudhir Kapadia, National Tax Leader, EY

Kapadia is referring to the 2019 decision by the government to cut the corporate tax rate on new units that start manufacturing by 2023 to 15%. The same rate should be extended to new service sector units too, he said.

The services sector needs a fresh look even on the mergers front, Kapadia pointed out. The income tax law allows the benefit of carry forward and set off of accumulated loss and unabsorbed depreciation when industrial undertakings – engaged in manufacturing, processing- undergo merger or amalgamation. But the same benefit is not applicable to the services sector.

Industry has been asking for a merger-neutral provision for services sector for years now. Why do we continue to exclude services sector from the definition of ‘undertaking’? It’s a very traditional mindset of the 60s-70s. Don’t try and legislate what kind of business should be eligible for what tax outcome. - Sudhir Kapadia, National Tax Leader, EY
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The second big expectation is to walk with the world on digital taxation, Mukesh Butani, founding partner at BMR Legal, said.

Recently, the OECD published Model Global Anti-Base Erosion rules to help domestic governments implement a 15% global minimum tax on multinational enterprises from 2023. The model rules will require countries like India to introduce Controlled Foreign Company legislation in its domestic law. CFCs are corporate entities typically set up in overseas low tax jurisdictions and controlled directly or indirectly by residents of a higher tax jurisdiction.

We have reacted with unilateral measures too many times in the past – equalisation levy, country-by-country reporting, significant economic presence rules etc. We would be wise to not react in Budget 2022 to the December Model Rules since India is now part of the inclusive framework.
Mukesh Butani, Founding Partner, BMR Legal

The third focus area ought to be alternate dispute resolution mechanisms which are currently in a “limbo”, according to Kapadia.

He pointed to Advance Pricing Agreements where close to 750 applications are pending. There have been instances where the applications haven’t been disposed of even after the statutory five year period is over, Kapadia said.

APAs allow taxpayers and tax authorities to determine in advance, an appropriate transfer pricing methodology for a given set of transactions over a fixed period of time.

The government has not been able to find the time and inclination to focus on making the APA mechanism work—increasing capacity, bringing in the right people etc. The way it ran until a few years ago versus today—there’s a vast difference.
Sudhir Kapadia, National Tax Leader, EY

The Authority for Advance Ruling is another example where dispute resolution is struggling. The AAR was replaced in last year’s budget by the Board for Advance Ruling, which, Kapadia said, is practically non-functional.

"Now we’re talking of mediation, which is good but whatever we’ve done so far on alternate dispute resolution—the success has been extremely patchy. And that’s something which Budget 2022 can realistically fix.”

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The final ask is there be no retrospective amendment to negate a certain Supreme Court ruling. In March last year, the apex court had curtailed the powers of the Directorate of Revenue Intelligence under customs law. The DRI, it had held, is not “the proper officer” for the purposes of undertaking reassessment of imported goods. And that it cannot reassess imports and recover duty if the goods are cleared for import by a Deputy Commissioner of Customs.

Section 28(4) of the Customs Act, 1962, mandates that “the proper officer” reassess the bill of entry, filed in respect of imported goods that have been assessed and cleared (by the customs officers).

DRI, as an authority, is supposed to be an investigation agency and not an assessment body, Butani explained. The ruling meant that all assessments that were done by the DRI stand to be non-compliant, he said.

After the Supreme Court judgment, at least six high courts have set aside DRI assessments. The quantum involved is significant. One estimate is 3000-odd assessments by the DRI are affected. There’s a real fear that there could be an amendment in the law to address this.
Mukesh Butani, Founding Partner, BMR Legal

Speculation aside, Butani said, we know from experience on retrospective amendment on indirect transfers the damage this approach can cause to investor sentiment. "It took us almost a decade to reverse that law. Not just this specific area but the government should be cautious while considering any retrospective amendment."

Watch the full conversation here