Budget 2019: Towards behavioural shift in taxpayers and regulators

Updated: July 9, 2019 8:12:30 AM

Union Budget 2019: With the Income Tax Department already exchanging information with agencies like the Goods and Services Tax Network and Registrar of Companies, the finance minister’s proposals are not only timely, but also promote tax compliance in a non-intrusive and non-adversarial manner.

Budget 2019, budget, startups,budget highlights, budget 2019 date, budget 2019 PDF, budget 2019 highlights, budget 2019 income tax, budget highlights 2019 indiaBudget 2019: Apart from GST, which is considered to be the linchpin of cooperative federalism in India, there have been several instances of government departments working together to resolve pressing issues of corporate India.

By Naveen Aggarwal

Budget 2019: With the Economic Survey urging the need for an optimal tax policy to foster investment, broaden existing direct tax base, and achieve an ambitious economic goal of $5 trillion in a few years, India Inc braced itself for a string of bold reforms from this year’s Union Budget. The finance minister, instead, walked the tight rope between fiscal prudence and setting the fundamentals for a more sustained and robust economic growth.

The focus of tax proposals in her Budget speech lay on achieving a behavioural shift in taxpayers and regulators alike to harness India’s undeniable potential. Traditionally, tax governance and compliance in India have both been inconsistent and insufficient. Several factors are to blame for this, but, simply put, the reasons find birth in the lack of trust between the taxman and the taxpayer. What was needed, therefore, was a catalyst to kick-start the growth engine and the Budget 2019 aimed at being that catalyst.

The path to maximum governance
Apart from GST, which is considered to be the linchpin of cooperative federalism in India, there have been several instances of government departments working together to resolve pressing issues of corporate India. Take, for instance, how the commerce ministry took up the issue of ‘angel tax’ notices being sent by tax officers to question the source and valuation of funding received by start-ups. Adopting a consultative approach, officials from the commerce and finance ministries held dialogues with representatives from the start-up, venture capital and angel investment communities that culminated into simplification of the registration process, which provided much relief to start-ups. Despite this step, there was still room for simplification, which the finance minister has now addressed by announcing that start-up valuations will not be questioned if prescribed disclosures are made. Also, an e-verification mechanism shall be put in place for tax authorities to authenticate the identity and source of the investor.

READ ALSO | Income Tax Calculator: Know post-Budget 2019 Income Tax out go here

Convergence and technology
A slew of other proposals indicate that the government intends to leverage technology for last-mile delivery. Significant amongst these is the cross-linkage being envisaged between the internal databases of the tax department and external databases of institutions like banks, stock exchanges and provident fund authorities. By expanding the reporting obligations of institutions for specified financial transactions in this Budget, the finance minister sought to strengthen the taxman’s database to not only aid detection of tax defaults (like Operation Clean Money following demonetisation), but also support pre-filled income-tax returns that would dovetail well with proposed faceless e-assessments. From this year, scrutiny proceedings are expected to be carried out anonymously by randomly-assigned teams of tax officers that shall communicate with the taxpayer only through a Central Cell, thus significantly reducing, if not eliminating, human bias.

With the Income Tax Department already exchanging information with agencies like the Goods and Services Tax Network and Registrar of Companies, the finance minister’s proposals are not only timely, but also promote tax compliance in a non-intrusive and non-adversarial manner. Another significant step has been to empower tax commissioners to satisfy themselves about a charitable trust’s compliance with other applicable laws, failing which exemptions may be withdrawn. The groundwork for this seems to have already been laid down earlier this year when the new tax audit report form for trusts contained detailed disclosures of other laws like the Foreign Contribution (Regulation) Act, 2010.

Even the announcement to make PAN and Aadhaar numbers fungible is a master stroke to achieve scale, since Aadhaar, which till now only provided an identity to individuals, shall finally lend an identity to their transactions also. Mandatory filing of tax returns by individuals undertaking high-value transactions like property purchase and foreign travel shall also deepen the tax base. Other proposals seek to streamline the tax law with the Insolvency and Bankruptcy Code, 2016, and permit tax-neutral demergers for Ind-AS applicable companies.

Historically, last-mile delivery of public services have been found wanting in India, due to the lack of seamless communication between different government bodies across central and state agencies. So, while the above are all laudable steps to achieve an envisioned convergence, their success would largely hinge on how well delivery channels and their participants are aligned to the finance minister’s objective. While it may be fair to expect some initial teething issues, it is essential that these be identified and resolved swiftly.

So, while the Budget stressed on the compelling need for behavioural change in both taxpayers and regulators, and proposes a series of measures that would foster mutual trust to help forge new public-private partnerships, how rapidly can India embrace this magic mantra would decide the fate of our ambition for becoming a $5 trillion economy.

(The author is partner & COO, Tax, KPMG in India)

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