Divided into eight sections, the book is nothing less than the Vedas on the subject, as was ascribed in the felicitation discussions. The chapters have been taken and adapted from articles and papers contributed by Shome for over four decades in various research journals, books and lectures. Besides dealing with key policy issues and economic principles surrounding tax policy in India, the book focuses on the elasticity of a developing nations tax system. More particularly, how a countrys growing social, infrastructural and developmental needs can be met without resorting to significant deficit financing. He prescribes a judicious mix of differentiated rates, adjustment for inflation and increased use of withholding tax and presumption taxation. To buttress his arguments, he supports his decision (or rather advice to the FM) for levy of the not-so-popular fringe benefit tax (FBT) in 2005. However, he admits that the FBT, which got repealed in 2009, was ahead of its time.
The book contains mathematical models used to explain general equilibrium theory and taxes. Any student of pure tax economics would find these chapters to be a delightful read. Innovative concepts such as global carbon tax, modified cash flow tax and mineral resources tax have been discussed to incite the curiosity of a thoughtful policy maker.
Interestingly, on future direction and tax reforms, he strongly advocates withholding taxes (WHT) for all forms of income. India has an elaborate WHT system. Instead, the idea should be to have clarity on presumptive taxation for specified activities undertaken by non-resident taxpayers. However, it is coincidental that OECD as a part of BEPS action point on taxation of digital economy has recommended withholding tax on digital transactions. Under the Indian constitution, tax can be levied on income and not expenditure. Hence, this has to be given deeper thought and not implemented just because its fashionable to do so.
Tax harmonisationa topic of debate in EUhas also been touched upon by Shome. It prescribes integration of personal and corporate tax for alleviating the problem of double taxation and harmonisation of VAT based on Origin Principle of taxation, namely, taxes levied in the state of origin, also called production-based taxation in many EU countries. Caring for nature, he recommends earmarking of environment tax revenue for its protection, besides carbon credits and levy of taxes on factory emission. For a country of Indias growth potential, such future tax policy reforms have to be taken into account while formulation of fiscal strategy and five year plans.
His recommendations on constituting a single tax for small tax payers did not surprise me, given his passion for segmenting tax payers based on their size. This is an area where the Large Taxpayer Unit (LTU) concept, indeed a well-intended step taken by India, has failed miserably. The LTU needs to be relaunched with original intent facilitate a dialogue with large tax payers and build trust, as the present system, leave alone failing to achieve the objectives, has resulted in a level of animosity between the tax payers and administration due to its implementation.
His recommendations on shift from VAT to GST, again a subject close to his heart, acknowledges the challenges and attributes a delay of reforms mainly due to Centre and state governments non-alignment. In addition, he feels that key issues in this major transition include flexibility in GST rate structure and in the rates during natural emergencies like floods or droughts.
The book acknowledges issues of concerns for tax payers on emerging international transaction matters due to aggressive stance taken by tax administration on transfer pricing adjustments (which run into lakhs of crores) and retrospective amendments. It also highlights the hurried introduction of APA, Safe Harbor Rules, postponement of GAAR and other measures to restore confidence of tax payers and investors.
Finally, his most important pill is on reforms in tax administration. While tax payers are anxiously awaiting the first report of the tax administrative reform commission (TARC) due to come out by end of this month, in his compendium, he emphasises the need to establish an ideal tax administration. To achieve this, he proposes a rationalised structure and management for the tax department leading to minimisation of moral hazards and corruption, while keeping the tax compliance cost low for the taxpayers. His three pillars of improvement include:
* Specialisation amongst tax officialsrecognising importance of functional rather than geographical division.
* Understand and recognise the growing links between direct/ indirect taxes and follow same principles for individuals. He also advocates giving separate consideration to taxes affecting business while having common tax offices for all types of taxes.
* Benchmarking of tax administration and building a sense of accountability in the process, with need for strict vigilance and formation of truth commission, as in South Africa. He acknowledges that the South African model is difficult to implement in India due to its inward nature in context of social challenges. Finally he recommends tax administration performance review, implementation of professional standards agenda and participation in cross-country exercises.
On tax incentives, Shome prefers a well-administered tax system with an overall low tax rate. According to him, taxes should be simple and certain, which are arguably the two most preferred attributes for foreign investors.
In this excellent volume, Shome has done an invaluable service by combining his vast practical experience of advising governments around the world on tax policy matters. His diverse knowledge gained while holding various prestigious positions worldwide throughout his career is evident from the insightful commentary and thought-provoking suggestions for tax reforms. The challenge to all law makers is to put these thoughts into action. I strongly recommend Shomes pill to the new government.
Mukesh Bhutani is managing partner, BMR Legal. Views are personal