As the nation-wide lockdown on account of COVID-19 enters into its fourth week, businesses are scrambling to assess every part of their operations to ensure their survival in the face of the massive negative impact on the global economy. The volatile situation that the economy faces is something that no one could in all honesty claim to have been factored into any business resilience strategies. While businesses struggle to survive and stay afloat in these times, governments across the world are tasked with not only fighting the pandemic, but ensuring that the economic impact is softened to the best possible extent so as to avoid societal unrest.
In an exclusive interview, CPO Innovation speaks to Mr. Pankaj Vasani on the concerns he sees from a tax perspective, and possible steps that may need to be taken to address the state of affairs.
CPO Innovation: Your views on the pandemic situation.
Pankaj Vasani: This pandemic proves the saying that – “if you want to make God laugh, tell Him your plans”. It has forced introspection of priorities right from individual lifestyles to manner of conducting business and even governing countries.
All individuals, industries and Governments made plans for many unforeseen circumstances. This is, of course, an event which nobody would dream of.
As far as the economy is concerned, I subscribe to the view that the situation is likely to get worse before it gets any better. This stems from the fact that is neither a purely sectoral issue nor a limited geographic issue – this impacts the globe and probably every human being in some way or other. Such a widespread crisis is bound to have a domino effect across societies. We can but pray at this moment that humanity is able to escape with the least possible harm. I am optimistic that we will overcome this pandemic also.
CPO Innovation: Taxes form a significant part of any government’s financial armoury, and also constitute a mechanism for them to provide support to specific sectors of society as well as industry. Your views from a tax policy perspective.
Pankaj Vasani: There is a Tamil saying that “Chattiyil Irundal Agapaiyil varum” (if I spelt it correctly) which literally means that “only when cooked food is in the pot, it will come in the ladle for serving”. Similarly, when Government treasury is not loaded (because of lockdown), how can the Government give incentives/support to industries… This must be kept in mind.
And therefore, the present situation requires an extremely delicate balance to be maintained. On the one hand, the government needs significant funding ammunition for fighting the pandemic, to protect its borders, to pay the executives, etc. On the other, it is sure to lose out on tax revenues due to the huge expected dip in economic growth. It will, therefore, have to tread a fine line between balancing its monetary affairs with stressed funding sources, while providing all possible relief to its citizens and wealth creators, and enabling them to survive (& come out of) the situation.
Any tax policy must keep in mind the Micro, Small & Medium scale industries and the workmen in the unorganized sector. So will we be looking at an increase in tax rates or possibly a healthcare cess? Are there any sectors that can really afford such a hike or cess? Or does the government instead look at turning the situation to its benefit and incentivizing businesses that wish to move out of China, or even Europe? Or Can the Government cut the salaries of its employees at least for the next two quarters to fund the industries till they come on track? Will the employees agree to such proposal to put the economy on track? I think at present it is important and necessary to put the economy on track than looking at anything else.
It has to be stressed though that the government can still do a lot more in terms of attracting foreign investors and providing them regulatory certainty, but this is as good a time as any. For e.g., the OECD has come out with relevant guidance on application of tax treaties in the current situation, and the government would do well to follow the lead and provide comfort in matters such as lenient interpretations for PE and POEM rules, allow-ability of Transfer Pricing adjustments, etc.
CPO Innovation: What are the challenges you foresee for tax collections?
Pankaj Vasani: In a word, immense. With the entire economy in lockdown and the supply chain impacted, it is obvious that regular inflow of tax collections will be impacted. What is important to note is that this is not a mere timing issue – the dip in collections for this period is permanent. Further, many companies are invoking force majure clause to rescind the contracts and may default in their payments for the supplies already received invoking a chain reaction. This may result in litigation in courts.
Hence, it may take minimum two quarters for the tax inflow to pick up and that too only when the supply chain is back to normal operations, but the hole that is being burnt in the government treasury is tremendous, make no mistakes. This is but natural in the current situation, and it would be incumbent on the authorities to take these factors into consideration and not go on the offensive to increase collections, as this would result in a detrimental effect on business confidence.
Furthermore, in a scenario where businesses are going to be struggling to survive, aggressively pursuing tax arrears may even push some over the brink. The government will, therefore, have to walk a tightrope and prioritize the survival of businesses and investor confidence over short term funding constraints.
CPO Innovation: What would you think are some steps that are recommended from a tax perspective?
Pankaj Vasani: I think first and foremost is to send out the right message to industry that the government intends to do all it can to relieve the COVID-19 stress on the economy, and importantly, that it is flexible, adaptable and responsive.
While multiple measures have already been announced, I feel the following steps may help the Government to instil confidence in the industry:
- It can defer tax payments, with a full waiver of interest, for at least one quarter.
- The Micro, Small & Medium scale industries may be allowed to collect GST and keep it as a Government loan (at least 50%) for a period of one year without interest and repay it in 24 months after the period. They should be made to submit the return but GST collection can be used as a loan.
- Additionally, it can also provide incentives to those who are willing to still make due payments. This includes advance tax installments, GST as well as tax litigation arrears.
- At the same time, all due refunds should be processed expeditiously (currently, only refunds up to INR 5 lacs have been directed to be processed). This measure will put cash in hands of the business and avoid situations such as layoffs.
- The recent budget amendment whereby Assesse will be required to pay a minimum of 20% of the demand for a stay should be deferred, and appellate authorities allowed to take a call on a case to case basis considering the financial situation of the Assesse.
- While contributions to the pandemic fund have been announced to be eligible for CSR, the government may also consider allowing tax deductions u/s 80G for donations towards fighting the pandemic.
- It may also be necessary to come out with special relief packages for sectors such as tourism, hospitality and aviation which are bearing the most negative repercussions of the lockdown.
- While the time limit for starting operations for an SEZ unit has been extended by 3 months, it may actually be beneficial to extend the sunset clause by a year or two, to incentivise any foreign manufacturers wishing to shift base/amend locational strategy.
- It may also evaluate providing additional relief to industries that undertake not to lay off employees, and also provide leniency in s. 43B claims such as for PF payments and leave encashment.
- It can also incentivise social welfare measures such as tax deduction for testing/ treatment expenses borne for employees, without it being taxed as a prerequisite in hands of the individual.
- Finally, the VsV scheme is touted to be a significant move in reducing litigation and recovering tax arrears – while it has been extended till 30th June, the possibility of extending it by at least another quarter should be evaluated, or alternatively, to at least provide for a staggered mechanism of payment.
CPO Innovation: What impact do you see on the Tax Administration?
Pankaj Vasani: As with every other sector, Tax Administration too is obviously severely impacted due to the lockdown. First of all, many tax offices, whether central or State, are extremely cramped. The biggest challenge would be in the absence of space. How will the tax authorities maintain social distancing when all of them start attending the offices? The Government has prescribed many practices for factories and establishments. Whether it will be able to strictly comply with these guidelines will be one of the challenges.
One of the important features of tax administration is conducting audits, investigations, etc., by sending its officers to check compliance with tax laws and/or to prevent evasion of taxes. Whether the Government will defer these regular audits/investigations at least for another one year needs to be seen.
Appeals against orders passed by the Assessing officers are pending before Appellate Commissioners/Tribunals/High Courts involving a huge amount of tax disputes. These forums are also heavily crowded. Even if orders are passed in favour of Government, in the present situation, whether the Tax Officers will be to recover those disputed taxes by adopting coercive force may be one more challenge.
The OECD FTA has also recently come out with some useful guidance documents on business continuity considerations to assist tax administrations as well as supportive tax measures. One of the key recommendations is to ensure clear, early and frequent communication with taxpayers. Additionally, it would be useful to have regular engagement with industry bodies, so as to have a pulse of the practical issues being faced by business and be able to respond to them well in advance of them becoming hurdles in business recovery.
The nature of the tax administration’s responsibilities means that there is limited scope for working from home, plus of course, the necessary infrastructure is lacking. This is bound to create a huge backlog for all tax proceedings, including return processing, assessments and appeals. Further, this will also have a ripple effect on all-time barring proceedings. It may, therefore, be necessary to provide a blanket and reasonably large extension to all such proceedings, so as to reduce the pressure on both the department as well as the Assesses. Besides, this is a good time to also evaluate the efficacy of the proposed e-assessment proceedings, whereby hearings would only be conducted through VC, if at all.
On the indirect tax frontage, while the GST council had already decided to defer the new return format and e-invoicing system, it may be advisable to formally defer this indefinitely till the economy stabilizes from the COVID-19 shock. I would, however, recommend that tax filing deadlines are maintained as is, with only payment deadlines extended, as this would be a valuable input to the government in the way the economy is coping, as also avoids creating too huge a backlog.
CPO Innovation: What would be your advice to tax professionals?
Pankaj Vasani: Tax professionals have always been the most wanted people. They can play a crucial role in bridging the gap between Government policies and industry expectations. They can help the business manage cash flow in the current situation. They need to be on top of the ever-evolving situation as also how their own business is being impacted. They can help manage funding through being aware of and taking benefit of any relief provided by the government. They also should ensure a constant dialogue with the authorities, especially in a situation where there are tax proceedings in progress or payments due which are likely to be impacted. It would also be useful to connect with industry colleagues on a regular basis and make joint representations to the government on critical issues.
At the same time, for businesses that are not greatly impacted or have the necessary wherewithal, such businesses should make the effort to pay their taxes on time considering it a civic duty in critical times. Finally, as I have mentioned earlier, it would be advisable for tax professionals to try and complete tax filings within time wherever possible, as otherwise, they may end up creating an unnecessary backlog burden for themselves.
About Pankaj Vasani
Mr. Pankaj Vasani is a business leader and finance expert with over two decades of experience in senior executive roles and as a board & audit committee member. Over the years, he has donned various hats – Group CFO, Finance Head, CEO, Tax/Legal/Compliance Head and member of Board of Directors. He specialises in operations, finance, legal, tax, treasury, and business strategy with demonstrated experience ranging in many geographies and multiple sectors from advertising/media/PR/entertainment to automotive, beverage, software, telecom & service industry. He has held leadership roles with Publicis Groupe, Vodafone, Coca-Cola Cola, & Subros.
By education, he’s a Chartered Accountant (England & Wales), Certified Public Accountant (Australia), Chartered Accountant (India) & Lawyer (Gold medallist; Delhi Univ., India). He has also completed his B Com (Hons) from Delhi Univ., EEP from IIM- Bangalore and EP (Intl. Tax) from Leiden University, Netherlands.