EscapeRevolution

Escape Revolution

The new tax plan

Union Minister for Finance and Corporate Affairs, Nirmala Sitharaman receiving the report from Akhilesh Ranjan, Convenor of the Task force constituted by the Government to draft New Direct Tax Law, in New Delhi. (Photo:ANI)

Taxes don’t usually bring down governments in India. There are several reasons for this, perhaps the most relevant being that only a small percentage of Indians pay income tax. Bearing this out is India’s abysmally low tax-to-GDP ratio, at 17.8 percent. For comparison, South Africa is at 27.1 percent, while emerging market economies like Namibia, Mozambique and Chile are at 28.5 per cent, 20.1 per cent and 28.5 per cent respectively.

In India, those who do pay tax feel unfairly squeezed since large sections of the economy remain outside the tax net. In 2017, of the total population of 1.33 billion, only 84.4 million Indians paid income tax. That’s about 6.3 per cent of the population. Many political leaders, including former finance ministers Arun Jaitley and P. Chidambaram have pointed out that when it comes to taxes, India is a non-compliant nation. And the problem isn’t limited to returns not being filed; even those who do pay tax tend to significantly underreport their incomes. As Prime Minister Narendra Modi noted in his 2016 new year’s speech, only 2.4 million Indians reported having incomes over Rs 10 lakh that year.

One consequence of so many Indians choosing to either avoid or evade tax has been that tax rates have rarely determined the nation’s voting patterns. However, a country’s tax structure is often crucial in determining the quantity and quality of investment it attracts, which in turn, has a substantial impact on a country’s growth rate-fundamental to the Modi government’s aim of growing India to a $5 trillion economy by 2024. Also, with consumption currently on a slide-at the lowest it has been in a while-a better tax environment could well prove decisive to reviving the economy.

Countries across the world often rejig their tax structures to make themselves more appealing to investors. In 2017, US President Donald Trump unveiled the largest corporate tax cut in that country’s history, slashing rates from 35 per cent to 21 per cent in a single move. As India stares at a slowing economy with dwindling investment, savings and consumption, perhaps a direct tax reform could provide a similar boost to business and industry. Crucial steps along the way would involve making compliance easier, reducing rates for business and industry and laying out a comprehensive dispute-resolution mechanism.

When the NDA formed the government in 2014, it came to power on a slew of promises and expectations. One of them was an overhaul of the Income Tax Act, a job that even the UPA had set out to do. However, that government proved unable to pass the Direct Tax Code Bill, 2010, because the UPA’s final session also proved to be perhaps one of its most unproductive. The first draft of that legislation was prepared by former finance minister P. Chidambaram; the second draft was prepared by former President and finance minister Pranab Mukherjee. But the bill lapsed when the NDA came to power in May 2014.

In September 2017, Prime Minister Narendra Modi reportedly told tax officials that the Income Tax Act needed changes to make the economy more tax compliant and therefore generate enough revenue to fund government agendas. The decades-old Income Tax needed to be upgraded to be in ‘consonance with the economic needs of the country.’ An expert committee was then set up in 2017, tasked with writing the new direct tax code and also with suggesting improvements to tax administration, among other things. After that, the committee’s terms of reference and constitution were changed, and the deadline for submitting the report has also been extended about three times.

Reforming and pushing through the direct tax code was one of the priorities former Finance Minister Arun Jaitley had set for himself-a priority that his successor, Nirmala Sitharaman, restated in Parliament within months of taking office. She also emphasised that the government was keen to reduce the compliance burden on tax payers.

While the details of the committee’s recommendations have been kept out of the public domain, one of the committee members, speaking on condition of anonymity, told INDIA TODAY that the proposals have been made keeping in mind the current economic realities and tax systems across the world.

The proposed tax structure is mindful of India’s current environment, and could include incentives to encourage investment, such as making it easier for corporates to restructure after mergers and acquisitions. The code also has proposals to make tax administration less intrusive. ‘Tax terrorism’ is a criticism that the government has repeatedly faced, with protests about harassment by tax officials coming from across the board, from start-ups to big businesses. The committee’s recommendations also include some on how assessments will be made and the use of technology to increase compliance in a non-intrusive manner. Other recommendations include suggestions to modify the tax code on dividends and equity and to incentivise savings and consumption. There are also suggested reforms to create an effective and efficient dispute resolution mechanism. The overarching theme behind the recommendations has been to introduce simplicity to the tax code and restore people’s faith in the taxman.

Whatever the final proposal includes, the government ought to be mindful of the fact that a slew of economic sectors are already facing financial distress and are looking for some sort of relief. On this count, the new direct tax code is expected to lower income taxes and take forward the plan to lower the corporate tax rate from 30 per cent to 25 per cent for all firms, currently limited to companies with sales less than Rs250 crore.

The Modi government has already overhauled India’s indirect tax regime via the Goods and Services Tax, doing away with over 17 taxes and cesses and replacing them with a five-tier tax structure ranging from five to 28 per cent. The next stop should be the Direct Tax Code.

[“source=indiatoday”]