Union Budget 2020: A Long-Term Tax policy has been, ironically, long overdue. It is missing even in the budget for FY21. However, one can see an emerging vision. With small yet incremental tweaks, there is a move to shift to an exemption-free tax regime. Currently optional, the announcements made yesterday clearly reveal a push by the tax administration to a simpler, flat-rate tax scheme, which is not ridden with distortions and temptations to influence taxpayers’ choices. A concessional tax rate without exemption is a first step to this vision.
Reduction in tax disputes is another limb of such long-term policy. As a first step, the Vivad Se Vishwas scheme has been introduced to end the disputes, perceived as vexatious, besides obviously enabling the government to generate short-term revenue. If successful, this scheme would clearly be extended for the resolution of select issues requiring specific schemes—transfer pricing, international tax, etc—which have clogged the dispute settlement system.
Instituting a formal regime for taxpayer rights in the form of the taxpayer charter is the third limb to this vision. The provision proposed reveals binding instructions would be issued by the tax board, which one would expect will obviate harassment, and other ills plaguing taxpayers.
More crucially, the direction seems to be towards removing measures that, mildly put, obstruct the free flow of investment. For instance, the abolition of the dividend distribution tax is one such measure that addresses business’s reasons for not investing capital in Indian companies. Also, the tax rationalisation on the employee stock options for startups will go a long way in ensuring that employees don’t deviate from their business commitments due to tax reasons.
As a gesture of trust on the taxpayer, the increase in audit has been extended to a threshold of Rs 5 crore, provided the taxpayer deals with the organised sector by ensuring cash receipts are less than 5% of the turnover. This will encourage businesses to transact through recognised banking channels, and move away from cash. Mandating reporting of transactions in case of charitable trusts, is another instance, where there is a gradual shift towards formalisation of the economy.
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Faceless appeals are a further move towards using technology to increase taxpayer ease, by saving the time and resources lost in waiting for a hearing time and location convenient for the officer. It also does away with avenues for corruption. If this succeeds, given that it is, right now, a pilot step, and for limited taxpayers, the idea would be to institute tax dispute resolution only by way of faceless transactions, both at the adjudication/assessment and the first appeal levels. The need to approach the judicial system by way of personal appearance should only be in tribunals or courts.
It is now up to the government to ensure that the small islands they have created are subsumed into larger administrative reforms. This will ensure that the tax laws are only directed towards collecting taxes, and do not interfere with business decision-making either on account of differential tax incidence or due to the ground-level practices of officers hindering business operation. One would hope that these small yet concrete steps are soon connected towards the evolution of a long-term policy, that still specifically sets out a crystallised mutual understanding between the taxpayer and the tax department.
Bringing back optimism by providing grievance redressal measures for genuine taxpayers would go a long way to rejuvenate lost trust. Tax terrorism needs to end, and this is, perhaps, the first right step in this direction.