Budget 2020 — Improving The Tax Environment
Tax cuts are often regarded as reform. True reform needs to encompass several other issues, write Dinesh Kanabar & Saurabh Shah.
The first full-year budget of Modi Government 2.0 will be presented by the Finance Minister on Feb. 1. The budget comes at a time when the economy is witnessing a slowdown in several sectors and is expected to grow at an 11-year low of 5 percent, led by a sharp fall in investment and consumption. The government has a tall order ahead as it walks a tightrope balancing the needs of the economy on one hand with limited fiscal room on the other. What is heartening to note is the personal attention being paid by the Prime Minister and a series of meetings held by him with India Inc., economists and other experts seeking their inputs on Budget 2020-21. Whilst significant tax rate cuts for companies have already been implemented, it is expected that another round of key reforms could certainly be on the anvil in order to revive the investment climate.
The Direct Tax Codel Panel submitted its report quite some time back. The report has not been made public, but it is expected that some of the recommendations made will find a place in the Finance Bill, 2020.
Often, tax rate cuts are regarded as tax reforms. True tax reforms also need to encompass several other issues such as certainty and consistency, speedy dispute resolution and accountability.
The following changes would augur well for India’s goal of improving its ranking on the ease of doing business.
Facilitating Tax Dispute Resolution Through Settlement Mechanisms
Given the staggering number of cases that are pending disposal at various levels, it is anticipated that the government will come up with an Alternate Dispute Resolution procedure that can enable the taxpayers to opt for a negotiated settlement or mediation with the income-tax authorities. While the contours of the scheme are not yet known, the task of mediation should be entrusted to a high-level panel comprising senior officials and independent outside experts with a buy-in from the office of the Comptroller and Auditor General of India. This will not only ensure proper efficacy and functioning, equity and balance but will also impose confidence and acceptance for the taxpayers who actually would want to go down this path for resolution of their tax disputes.
Rationalisation Of Tax Rates
When the Finance Minister delivered a shot in the arm to the economy in September 2019, she considerably reduced the tax rates far beyond the wildest expectations of corporate India. This is a major positive and deserves to be absolutely commended. However, one wonders why the benefits have been restricted only to corporates and not to other business entities such as LLPs and partnership firms. This needs reconsideration.
Further, despite the headline rate of tax being reduced to 25 percent / 17 percent for certain companies, Indian taxes continue to remain in a high range not only because of the combined effect of the rates (basic rate + dividend distribution tax / buyback tax + proposed Branch Profits Tax) but also due to the widened scope of ‘income’ that now includes several items that were historically never part of the tax base. These indicate that the effective tax cost in India continues to increase. It is perceived to be quite high by international standards and often acts as a deterrent to investment. In addition, it provides an incentive to engage in tax avoidance and evasion. Thus, a moderation of tax rates across the board will not only help in increased tax revenues but will also lead to increased compliances and widening of the tax base.
Towards this, the doing away of the DDT, rationalisation of capital gains tax and personal tax rates should usher in welcome changes in the coming budget.
The elimination of DDT will leave investible surplus with companies and leave taxability in the hands of the recipients without impacting the revenues.
Need For Consistency In Tax Administration
The task force appointed by the government to formulate the Direct Taxes Code is believed to have introduced a concept of ‘public ruling’ wherein the taxpayers will have the option to approach the Central Board of Direct Taxes for clarification on any important point of law. If implemented in its true spirit, this will indeed become a landmark change and will help in ensuring consistency in the tax administration.
To supplement this, the law should also enable the taxpayer and the assessing officer to jointly refer questions of law and interpretation, to a specified senior officer in the CBDT who is tasked with ensuring consistent application of tax law, rules and the board’s own circulars throughout India.
In cases where an assessment is framed on the basis of such a reference, an appeal should lie straight to the Appellate Tribunal, rather than the Commissioner (Appeals) or the Dispute Resolution Panel. The officer so nominated should be required to update and revise his position on issues based on judicial developments, and also determine which decisions warrant further appeal. A mindset change at the tax administration level is required so as to be fair and equitable to the taxpayers, instead of being driven by targets. This will significantly help in ensuring consistency and preventing repetitive appeals.
Improving Accountability
Through the provisions contained in the last Finance Act and in the subsequent addresses by the Finance Minister to the media, the government has repeatedly expressed its desire to do away with ‘tax terrorism’. Towards that end, the government proposed that the interface between taxpayers and the revenue department be minimised or eliminated. It desired that all such interface be electronic and that the use of discretion available to the revenue departnment is eliminated.
This concept of ‘anonymous’ and ‘faceless’ assessments has been taken a step further by the launch of the E-assessment Scheme, 2019, and the establishment of National e-assessment Centre.
While these are truly noteworthy changes that will facilitate in improving accountability at the ground level, certain other measures in this regard may also be considered. For example, a revamped and high-powered Tax Ombudsman could be set up to facilitate the redressal of taxpayer grievances. The ombudsman can also identify and report on systemic problems faced by taxpayers on an annual basis after consultation with taxpayers and industry representatives. To ensure independence, such an ombudsman may be set up as part of the Prime Minister’s Office. Similar measures have worked extremely well in other countries and have helped improve the credibility of their tax administrations. A similar recommendation was also made by the Tax Administration Reform Commission a few years ago but this was unfortunately not implemented.
It is also important to appreciate that shortfall in collections often arises due to multiple factors. Not all of them—like tax rates and economic cylces—are within the control of the tax authorities. Hence, a single source-agnostic approach to tax collections should be ended so as to ensure that resources of the tax department are not focused on maximising collections to the exclusion of other priorities.
Dinesh Kanabar is the CEO, and Saurabh Shah is a senior tax professional, at Dhruva Advisors.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.