1. Why India needs to flatten tax rates, better tax administration

Why India needs to flatten tax rates, better tax administration

Given the lower tax rates in most competitor countries, not surprisingly, NITI Aayog’s three-year action agenda joins finance minister Arun Jaitley in talking of cutting rates.

By: | New Delhi | Published: April 29, 2017 4:59 AM
Apart from projects like Insight which will give the taxman greater ability to get a 360-degree view of assesses, seeding PAN cards with Aadhaar will help ensure the problem of fake PANs disappears.(Reuters)

Given the lower tax rates in most competitor countries, not surprisingly, NITI Aayog’s three-year action agenda joins finance minister Arun Jaitley in talking of cutting rates. In the case of stamp duties on property across states, as NITI suggests, lowering rates to a uniform 3-3.5% will boost demand for housing and commercial property by lowering costs—at Rs 105,000 crore in FY16, these contributed as much as 7% of the total revenue of states. The suggestion to unify customs duties at 7% is worth following since, apart from removing the issue of inverted duties, it will send out a powerful message on India lowering import duties.

Indeed, as a recent paper by Brookings India head Harsha Vardhana Singh points out, 90% of non-agriculture imports are subject to a duty of less than 10% even today. Presumably, NITI Aayog is not talking of agriculture since it is not clear Indian agriculture would be able to compete with 7% import duty levels in its current state. Since, in the case of corporate tax rates, several of the exemptions being cut have to be grandfathered—of the seven already done, two will be withdrawn only by 2020-21—the promised cut to 25% will depend upon how quickly compliance is improved.
For an independent body, what has not been said is equally important.

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NITI is right to applaud GST, but whether it is a significant reform or not will depend upon whether the final rates will be lower than what are applicable today—as for an automatic reduction in rates as compliance rises, NITI is being too sanguine and only needs to look at the history of VAT to see this. In the same vein, the failure to talk of the anti-profiteering law (in GST) or retrospective taxation (in the case of corporate tax) stands out like a sore thumb.

Where NITI is right, though, is in asking for reducing the scope of interpretation through precise formulation of rules and regulations that spell out in detail the tax liability under specific suggestions. Indeed, both CBEC and CBDT would do well to track tax orders 24×7 in order to do damage control quickly—had this been done, a lot of the tax terror via transfer-pricing or orders applying MAT to FPIs would have been quashed faster. NITI’s most important recommendation is the creation of a disputes management vertical that is separate from the tax collection function—a big lacunae, as has been pointed out earlier, is that the taxman cannot enter into a negotiated settlement with any party.

While NITI echoes the prime minister’s talk of assessing taxmen on the basis of their success/failure—in winning/losing appeals—and the revenue secretary gives details of taxmen who have been punished for frivolous litigation and possibly corruption, there is not sufficient information in the public domain to come to a conclusion on whether a suitably robust system has been put in place. Given India’s poor tax-compliance, NITI is right in pointing to the importance of enhancing the taxman’s ability to detect this by using ICT tools. Apart from projects like Insight which will give the taxman greater ability to get a 360-degree view of assesses, seeding PAN cards with Aadhaar will help ensure the problem of fake PANs disappears.

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