HITESH D. GAJARIA
Chartered Accountant
(BCAS
Lecture Meeting, 8thJuly, 2020)
A
report by CA Riddhi Lalan
Hitesh D.
Gajaria, a respected member of
the BCAS family since 1985, delivered a remarkable speech at the BCAS
Lecture Meeting on 8thJuly, 2020. We are publishing this summary
just when the profession is at the threshold of change, a trending theme of 2020-21:
Tradition, Transition and Transformation, adopted by the BCAS. A
summary cannot convey the full import of his talk but we hope it will enable
the professionals to get an eagle-eye view of the landscape of the tax
profession, both near and far. We would recommend that you also watch the
captivating talk on the BCAS YouTube channel.
The tax world is in a
state of rapid flux. Earlier, the tax profession was all about filing returns,
assessments, filing appeals and litigating matters. From simple and
straight-forward days, where the most common tax concerns were additions on
account of lower GP Ratio, deductions u/s 37 and revenue expenditure vs.
capital expenditure for the Income-tax and the lack of C-Forms in the Sales Tax
Assessments, the tax profession today has morphed into a complex, multi-dimensional
arena requiring unique and varied skills from the tax professionals.
In light of this
background, the learned speaker sought to dwell upon the most gripping
questions for the tax professionals today – What are the current global and
local trends? What factors have caused the changes? And as a result, how is the
tax world different today? Is tax planning still possible? What is the future
of the tax profession? What can be done by a tax professional to stay relevant
and on top of the changes?
THE CURRENT TRENDS
Global
- Increased reporting
obligations in a number of tax jurisdictions.
- Increased collaborations
between tax authorities of different jurisdictions and robust exchange of
information mechanisms.
- Tightened rules to
combat profit shifting with reference to concepts like transfer pricing, which
India adopted only in 2002, but the US had since the mid-1960s.
- Increasing tendency to
focus on ‘formula-based approaches’ to profit attribution.
- Strong anti-abuse rules
to target treaty shopping and other abusive arrangements.
- No consensus on tackling
the tax challenge arising from digitisation of the global economy. Even if a
consensus is reached, it may result in re-thinking of the way taxation of
income is approached and highly sophisticated and complex rules which a tax
professional will have to master.
- Increased blurring of
direct and indirect taxes, with a shift towards transaction type tax levies
invading the domain of direct taxes.
Local
- Protectionism and
increased unilateral measures, triggered by the revival of nationalistic
politics in various nations, developed as well as developing, and partially by
the slow pace of multilateral reform in tax.
- At the same time,
countries still want to attract investments (both domestic and foreign) by way
of large headline rate cuts for businesses to flourish in a jurisdiction. While
this may trigger another round of tax competition, there will be greater need
for not only tax competition but also tax co-operation. Tax war is an extreme situation
which no country can afford today; however, tax competition shall always
sustain.
- Proliferation of
preferential regimes (e.g., patent box regimes).
- Many countries have
combated preferential regimes by way of disallowance provisions for foreign
related party transactions.
- Uncertainty over tariffs
and potential trade wars has ripened the entire area of customs and indirect
taxes for rethinking and overhaul.
- Unilateral measures to
tax the digital sector have been introduced by many countries including India.
- In many countries,
including India, huge compliance burden has been embedded at the stage of
business transactions taking place, leading to huge burden on businesses.
- Closer home, an oncoming
storm of tax assessments, audits, recoveries and tax enforcement measures is on
the anvil because the government needs to start recovering taxes to make up for
the increasing fiscal deficit and to fund more social welfare programmes if the
needs of the lowest strata of society have to be met.
WHAT FACTORS HAVE CAUSED THESE CHANGES?
The changes in the tax
trends began after the global financial crisis of 2008 which put huge fiscal
pressure on governments worldwide. Improving tax compliance and increasing tax
enforcement were seen as better routes rather than increasing tax rates,
leading to increased global political interest in tax issues and driving the
agenda for tax reforms. There has been a greater public focus and media
scrutiny on taxpayer behaviour (Apple, Starbucks, Amazon, Panama papers leak,
etc.). While there has been an increased alignment of interests between nations
with exceptions, tax simplification, rationalisation and reforms have led to
even more burdensome compliance for taxpayers. Covid-19 could be yet another
turning point for unknown reforms in the tax world.
HOW IS THE TAX WORLD DIFFERENT TODAY?
|
THEN
|
NOW
|
- Tax
liability depended on the strict letter of the law
- Remedies to correct abuse lay with the legislature to amend the tax laws
|
- Tax
‘morality’ has gained significance
- Factors such as substance, purpose and the acceptability of the
outcome are extremely relevant for both taxpayers and advisers
|
- Secrecy and confidentiality was generally maintained
|
- There
has been a rise in publicising tax outcomes, naming and shaming of tax
defaulters
- Increasing data leaks have proved that the so-called tax havens have
been mirages in some sense
- Information asymmetries between countries have been largely plugged through exchange
of information mechanisms
|
- Tax
matters involved only the government and the taxpayer assisted by tax
advisers
|
- List
of stakeholders has expanded to include the media, NGOs and even
consumers
|
- Compliance was a labour-intensive and assured source of regular work
|
- Compliance functions are being radically overhauled through use of
technology tools
|
- Clear
distinction between tax avoidance and tax evasion
- Tax
avoidance was thought to be a goal
|
- The
term ‘tax avoidance’ is under a cloud
- The
new standard is ‘tax morality’
|
IS TAX PLANNING STILL POSSIBLE?
The days of tax planning
in the form of reduction of tax liability with little or no impact on economic
circumstances and ascertaining and implementing the most tax efficient way of
achieving legitimate business objectives are over. That type of tax planning
which disregards commercial realities no longer exists but it has evolved. Tax
planning, in the traditional sense, will no longer work in an era where
international measures such as CFC, MLI and domestic measures such as General
Anti-Avoidance Rules are in place. However, planning for real business
transactions is still possible.
A professional, who is
fully grounded in understanding and mastering the law and able to guide
businesses about what is permissible and what is not, will sustain. However,
any planning will now involve a much higher risk of scrutiny at assessment and
judicial levels. Higher threshold for acceptability and higher risk of scrutiny
of the transactions from a large number of stakeholders would be inevitable.
There is heightened risk of such transactions being reported on the front pages
of newspapers due to increased information availability; a professional must
measure himself by these standards. Extremely robust documentation and robust
proof of commercial substance will be critical.
WHAT IS THE FUTURE OF THE TAX PROFESSION?
The entire platform of tax
services will rest on three main pillars which will broadly define how tax
professionals may need to specialise their skillsets and garner focused experience:
(1) Technology-enabled tax
compliance:
- Technology has
ruthlessly changed the landscape and has been eagerly embraced by tax
authorities; this, perhaps, has been a big revelation!
- It is the need of the
hour to completely adapt and master technology to stay ahead.
- Competition would not
only be limited to the tax professionals but also more disruptors, say
non-professional technology firms, who enable compliance at a fraction of the
cost, will now enter the arena.
- Technology using
Artificial Intelligence (AI) and Machine Learning (ML) must take over a number
of repetitive tasks.
- Technology has raised a
question as to ‘Whether professionals, going forward, would even be engaged for
compliance?’
- Compliance would not be
dead for a professional, but will need adaptability and agility.
- Additional challenges of
data safety, security and protection need to be addressed.
- By embracing mass
compliance and processing data in larger volumes, a tax professional can gain
leverage from the data available which will open a whole new vista predicting
tax outcomes to better serve clients.
- While drafting and
research has been taken over by AI, there are two ways to look at it – (i)
threat to routine compliance, and therefore, accept technology; (ii) opportunity
for value addition due to increasing uncertainty.
- Technology has merits
but with the overload of the digital world there is also digital distraction.
Tax professionals need to engage in deep work, detox periodically from
technologies and opt for in-depth and consistent reading. Advisory services
flowing from such detailed reading and connecting theory to practice in how
that impacts a client is now more valuable.
- Technology cannot
substitute experience and deep knowledge. Here lies the true value of a tax
professional.
- By using algorithms and
data mining, the Department is in a position to point out anomalies. Tax
professionals need to be better prepared to address such anomalies. To walk the
path of technology, assistance from data scientists may be required.
(2) High end advisory:
- Global convergence of
tax methodologies, the drive against base erosion with accompanying changes in
domestic and international laws and the emergence of and seeping in of
transaction tax type levies, gives rise to fresh challenges for a professional
to overcome.
- Today, with the
convergence of accounting and tax principles, giving clear preference to the
doctrine of substance over form and new and ever-changing corporate law,
foreign exchange and SEBI regulations, we are in the middle of a perfect storm
with attendant opportunities.
- There is a perceived
need for professionals who have experience in more than just one or two core
areas and also for those professionals who can collaboratively work together
with other professionals in different disciplines to evolve solutions which
overcome complex problems, while simultaneously not falling foul of any
regulations.
- A longer-term strategy
to develop and nurture appropriate talent needs to be undertaken because, in
this arena, too, sister professions are nibbling away at pieces of work that
Chartered Accountants traditionally did.
(3) Litigation:
- Complexities and
uncertainties shall lead to an explosion of tax litigation.
- The tax professional has
only witnessed the implementation aspects of GST; audits are yet to commence.
- There was no reduction
in number of tax officers due to digitisation of the GSTN. These officers would
be trained to do tax assessments more intelligently. The Income-tax Department,
also, has sharply climbed up the learning curve. Even judges in Tribunals and
Courts are keeping abreast with latest trends.
- Conflict between the
needs of the government to garner more revenue and that of businesses to
conserve more revenue will result in a sharp increase in litigation.
- At the same time, it
needs to be understood that not all litigation is good. Hand-holding and
guidance to clients would gain relevance to decide which litigation to pursue
and which not to, having regard to the alternate forums of dispute resolution
available under domestic laws as well as under international tax laws.
- Government is also
realising the futility of litigations and therefore a scheme like VSVS
is an attempt to clear such backlogs.
- The tax professional
needs to be nuanced in how to assist clients to shape their litigation
strategies. Jurisprudence is not static as more case laws are available online
nationally and internationally.
- Mandatory disclosure
regulations in case of aggressive tax positions require a balance in audit,
assurance and litigation.
These three pillars are
not independent compartments. A strong professional may have competency either
in all or in more than one of these.
Certification assignments
should be taken up only if capabilities and professional competency are
available before pitching for such assignments. The Department is now equipped
with algorithms to intelligently search all the reports and ferret out
anomalies. Therefore, there is no easy way, either to discharge the certification
function correctly or refrain from accepting – there is just no other option.
Tax risk in
the corporate world: Barring a few
exceptions, there is polarisation in the way the market is valuing companies
having clear, transparent, ethical policies. Effective tax rate is not to be
viewed in an absolute sense; it needs to be looked at on a comparative basis,
based on a bench-marking analysis and tax policies and decided accordingly. The
tone and culture of the corporate decides whether tax risk is a subject of
discussion in the Board Room. Adverse tax consequences with attendant negative
publicity is already tinged with social stigma, at least in the minds of independent
directors whether the corporates believe in it or not. Therefore, tax risk is,
increasingly, forming a part of the Board Room discussions.
HOW TO STAY RELEVANT?
- Maximum advantage
available with the younger professionals having agility, ability, keenness,
inquisitiveness and willingness to change.
- Develop a willingness to
adapt to changed circumstances.
- Ability to manage tax
risks without overpaying taxes.
- Adherence to ethical
standards is not old-fashioned; it is expected and demanded today.
- An analogy may be drawn
from the letter ‘T’. The vertical line is the depth and core. Develop that
depth, that core, own it, invest in it and nurture it. But do not forget the
horizontal line which is the adjacent line. It is now, more than ever,
important to read commercial news, develop good communication skills,
understand cultural differences, learn personal etiquette, etc. Both lines need
to be worked upon simultaneously.
- SME firms and bigger
firms need to come together and collaborate, especially after the Covid-19
pandemic.
- Develop cutting-edge
technical skills and become comfortable with a fast-paced legal and regulatory
environment.
We find
ourselves at the crossroads to reinvent ourselves and today is the day to
start. When nothing is certain, the maximum opportunity lies ahead – just
re-trim your masts to catch that wind.
