The Government recently set up a high-level committee headed by Parthasarathi Shome, which will interact with trade and industry associations on tax matters every Wednesday. Including representatives from the tax policy wings of Central Board of Excise and Customs (CBEC) and Central Board of Direct Taxes (CBDT), the forum aims at having a two-way exchange of views — industry concerns on tax provisions/ ongoing disputes, and the Government’s perspective on these. This is a welcome move that will hopefully result in concrete action.

To make it succeed, certain ground rules are needed. Industry should not view it as a forum for seeking new exemptions or concessions. Rather, the objective should be to resolve tax disputes and anomalies. The Government, on its part, should ensure that the discussions are taken to their logical conclusion, be it in the form of a formal clarification, notification or amendment in law.

The forum will also have an uphill task in terms of prioritising the representations. One would expect issues with wider industry ramifications (or cutting across sectors) to be taken up first, rather than those confined to specific companies/ transactions. For instance, the manufacturing sector would want the Cenvat credit regime to be rationalised and simplified. The restrictions on claiming credits for construction, employee-related expenses, job-work transactions and so on not only add to cost but also throw up various interpretations. In this regard, the M.K. Gupta Committee’s recommendation for a liberal Cenvat credit regime should be put up for public debate.

Also, the Input Service Distributor mechanism for transferring credits from a central location (say, a corporate office) to respective factories has become a compliance nightmare for many companies. Further, in some sectors such as auto components, the inverted duty structure persists, translating into blocked Cenvat credit.

Another critical area that merits immediate attention is the excise duty valuation mechanism for a manufacturer selling at a loss. Following the recent Supreme Court ruling in the case of Fiat, authorities have initiated inquiries/ proceedings against such manufacturers to recover the differential duty on the basis of actual cost of production plus some notional profit. The issue should be addressed urgently, as it is common industry practice to sell products below cost to penetrate the market.

In the service sector, the new negative list-based regime has raised several new challenges, both in terms of interpretation of law and operational difficulties. For instance, there is ambiguity on the taxability of cross-border transactions between the head office and branch/ project office, applicability of tax on consortium arrangements, and services provided by employer to employees (such as transport and canteen). Also, with the widened ambit of ‘reverse charge’ transactions, many companies find it difficult to track such expenses on a real-time basis for timely payment of service tax. Similarly, there is urgent need to expedite service tax refunds, which are often delayed.

For sectors in which the ambiguity is greater (such as real estate and infrastructure), a separate set of clarifications/ amendments may be attempted.

The new forum can bring much-needed respite to industry. Needless to say, it should be adequately staffed and empowered to carry out independent research. To make the process transparent, a formal communication channel may be opened to convey the status of the representation received, discussions concluded, the Government agency involved and so on. This will instil faith in the Government’s commitment to resolving industry concerns.

In a country grappling with tax controversies, the forum can make a valuable contribution by regaining investor confidence. The consultation process is all the more important as we move towards adopting the Goods and Services Tax, or GST.

The author is Partner — Tax, KPMG in India

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