By TIOL News Service

NEW DELHI, SEPT 15, 2013: THE Prime Minister’s Economic Advisory Council (EAC) has proposed a slew of tax reforms ranging from clarity on transfer pricing to incentives for specific sectors to attract both foreign and domestic investments. It has also called for significant growth in tax receipts without increasing tax rates to fund social welfare schemes.

In its Economic Outlook for financial year 2013-14 issued on 13th September, EAC says: “Transfer pricing is one of the most contentious tax issues and directly relevant to foreign investment, with 70% of the world’s transfer pricing litigation emanating from India.”

It continues: “These include domestic transfer pricing, share valuation of intangibles, interest on inter-company loans and guarantee fees, multiple year data, etc. It is crucial that the issue is addressed for encouraging investments. Removal of tax uncertainty is critical for investment, both domestic and foreign.”

As for the proposed goods and service tax (GST), EAC has recommended that all products should be included in the constitutional amendment bill that would pave the way for GST.

It has recommended that exports should be exempted from service tax as the present pay and claim refund mechanism increases costs, time and unpredictability.

The report suggests: “Software exports could be accelerated by easing domestic movement of people between STPs (software technology parks) and SEZs (special economic zones) and making inward visa easier and taking up the case for easier access to US visas for IT firms.”

Discussing the importance of global and indigenous production chains for giving a leg-up to domestic manufacture, it has recommended that taxation framework should be restructured for the electronics sector where the value-addition remains less than 10%.

EAC has pitched for initiatives to increase total tax revenue collection by 3-4% of gross domestic product (GDP) to 20% of GDP. This target should be achieved through rationalization of direct and indirect tax systems and consequential broadening of tax base including bring more services under the service tax net.

Advocating the need for promoting High Value Agriculture (HVA), it points out that existing tax system is biased against fresh fruits and vegetables.

It observes: “One of the major constraints which inhibits the development of processing of HVA produce is the skewed taxation structure at the Central and State level applicable to the sector. Unfortunately, agro processing is seen as a luxury product and taxed at several points, leading to a cascading effect on the final prices of the processed product. This is the reason why no large scale value chains have evolved in India to process the variety of HVA available.”