14 January 2014, 11:34 AM IST
Globally, large corporates including multi-national companies (MNCs) find themselves in the harsh spotlight of the tax administration.
While India is no exception, recent interactions between several large corporate tax payers and the tax departments have largely been confrontational. Often, ever burgeoning tax collection targets are said to be the primary culprit behind large tax demands, which often don't stand the test of tribunals and courts. Lack of understanding of cross border business operations is another root cause of agony for MNCs, as has been witnessed in the spate of transfer pricing litigation relating to marketing intangibles.
In this backdrop, there is an urgent need for the Tax Administration Reform Commission headed by Parthasarathi Shome to look into the tax administration of large corporate tax payers.
One may have thought that the Large Tax Payer Unit (LTU) system, which is a single window tax facilitation centre, would have been welcome by India Inc. Under the LTU system, each large taxpayer who has opted to be covered is assigned a senior tax official as a single point contact.
Taxpayers engaged in the manufacture or service sector which have paid excise or service tax dues of more than Rs. 5 crore or advance corporate tax of Rs. 10 crore or more can opt to be covered by a LTU.
In addition, the option to transfer any excess CENVAT credit (of central excise duty or service tax) accumulated in one unit to any other eligible unit is a huge advantage for taxpayers having pan-India manufacturing units.
Yet, since its inception in 2006, only 175 odd companies have opted for this scheme and exiting the scheme has proved to be cumbersome. Recently, a large tech MNC which wanted to exit the LTU system from April 1, 2013 and sought transfer of its tax records back to various individual tax offices, found itself embroiled in red tape. Ultimately, post a favourable order of the Karnataka High Court, this large taxpayer was allowed to exit the LTU system.
Lately, public statements have been made of the intent to make the LTU system compulsory for large companies; to expand its scope by bringing under it group companies even if they don't individually meet the threshold criteria of tax payments and of doing away with the exit option. These statements have caused anxiety.
On paper, the LTU system is designed to reduce tax compliance costs and delays for the large taxpayers. In turn, it also facilitates the tax administration to ensure tax compliance –data mining, for instance is easier.
Large corporate taxpayers anywhere in the world, place a premium on the ability to finalise their tax positions in real time, which helps them minimise unpredictability in business operations.
LTUs are used by governments to create mutual trust, usher transparency and resolve issues in a time bound manner, resulting in effective tax administration and collection. It is important for officials manning LTUs to understand business perspectives – an improved economic and commercial understanding is vital. Unfortunately in India, LTUs are perceived as hunting grounds for the tax administrators.
The Large Business Service (LBS) system in the UK currently covers 770 companies. It is structured on sectoral lines which aids in understanding of the dynamic commercial environment in which different business operate. The sector leader also supports client relationship managers (CRMs) who are allocated to each taxpayer.
Following discussions with each taxpayer and consultation with tax and sector specialists, CRMs compile a report of perceived tax risks and tax positions and share this with the large corporate taxpayer. Any differences in view are identified and resolved and the way forward is agreed. To deal with the complexities of transfer pricing, an internal board has been set up, which results in speedy resolutions in a time bound manner.
Most important of all, LBS officials also recommends changes to legislation when it finds there are gaps or defects in law. Recently, the large corporate forum, comprising of nominated members of large corporate taxpayers and LBS officials was re-launched. Periodic meetings help in better understanding of business needs and compliance burdens.
LTUs in India first need to adopt such tax friendly measures, only later can mandatory coverage be contemplated.
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