In just a decade, Dhruva Advisors has come to be regarded as a credible source of tax and regulatory services in India, with some of the largest MNCs among the firm’s clients. Dinesh Kanabar, CEO, talks about the direction and pace of India’s tax reforms, the need to cut disputes that lock capital, and what more requires to be done to achieve the twin but potentially mutually compatible objectives of revenue productivity for the government, and growth of business and economy. Excerpts from an interview with Priyansh Verma and K G Narendranath.
Q. Tell us about the journey of Dhruva Advisors.
Our vision from the start was to become a tax and regulatory boutique that was free from conflicts, a thought leader, and a provider of comprehensive services in the tax and regulatory space. We believe we have carved a niche by challenging the status quo and placing integrity and expertise at the core. We have now expanded to 10 offices across India, the UAE, and Singapore, with a team of 395, including 33 partners. We continue to offer our clients holistic, out-of-the-box solutions that combine risk mitigation, compliance, and tax optimisation.
Q. The Income Tax Act, 1961 is being rewritten. What should be the major areas of focus?
Among the most pressing areas for reform is (the inordinate delays) in resolution of tax disputes. Currently, there is a substantial backlog of appeals, with cases taking almost five years to progress through the first appellate stage. Disputes often escalate to the Supreme Court, especially in cases where the stakes exceed Rs 5 crore, and final resolution takes up to 15 years. Such delays are a barrier to India’s goal of enhancing ease of doing business.
A potential solution is to allow taxpayers to settle disputes at the assessment stage itself, thereby avoiding prolonged litigation. One-off initiatives like the Vivad Se Vishwas scheme have had only limited impact. A more robust and institutionalised approach is required.
Another area demanding clarity is the interpretation of tax treaties. Recent judgments have highlighted ambiguities, particularly concerning provisions such as the Most Favoured Nation clause.
Q. TDS structure is seen complex…
The withholding tax (TDS) provisions are a source of considerable disputes. Simplifying the system could involve introducing just three standard rates: one for salary income, a uniform rate (e.g., 2% or 5%) for all other payments, and a penal rate for specific categories such as income from lotteries or gaming.
The reason why TCS (tax collected at source) was introduced was to track transactions, rather than for revenue. Wherever GST is levied, the tracking already exists. You can have TCS only where there is no GST.
Q. The government hiked the capital gains tax on certain assets in the previous Budget, and this is now the most elastic source of revenue. Do you think this source of taxation needs further tweaks and how?
If you look at capital gains tax, what the government did was to increase the long term capital gains tax rate on equity investments/shares from 10% to 12.5%. I would not be surprised if in the next budget, it goes even higher to 15%, and eventually to 20% in the next two to three years. This is a global rate, which people can well afford.
Even for a foreign investor, for example, even if you take dollar-denominated returns, and rupee is depreciating by say 3-4% a year, you are paying 20% on your returns today. In India, it’s far better than anywhere in the world (in terms of benign capital gains tax). So people are going to invest in the Indian market for the returns that the country is able to provide.
Q. The personal income tax (PIT) collections are growing at much higher rate than corporate income tax mop-up. Is this the right way to go?
Corporate profits have not been growing fast. In the last two quarters, the profits have either plateaued or declined. At the end of the day, corporate tax will depend on what profits companies are making, and if the profitability is under pressure for a variety of reasons, then obviously collections are going to go down.
So far as the individuals are concerned, a lot of money has moved from the informal sector to the formal sector. If you look at the amount of money that has gone into mutual funds, stock markets, it is clear that the formalisation of the economy is gathering pace. And a lot of this money, that had otherwise remained untaxed in the hands of individuals, is being taxed at that level.
Q. At present, about 2-3% of Indians pay income tax. Don’t you believe the tax base is too narrow?
I would qualify the assumption that only 2% of people pay tax on income. Take a law firm that has 400 partners. When the partners get money from the firm, they don’t have to pay tax. This is what law provides for and hence is no evasion. So, there are a huge number of people (individual) taxpayers who you are not counting. Secondly, agricultural income is not taxable. There is an exemption for income up to Rs 7 lakh (for PIT) now. If you tax farmers with a much higher limit, say, Rs 50 lakh, and the whole issue is separated from politics, what is the harm?
Q. As far as the taxation of the digital economy is concerned, what is the way forward for India?
The OECD came up with a two-pillar framework–pillar one and pillar two. Pillar one, which is basically aimed at the digital economy, says countries should be allowed to tax people on the basis of providing market access. But now the US has come down to say we don’t accept pillar one, because this is negatively impacting us. So the entire OECD framework, which took about seven years to build, is going to crumbs.
And with Trump now on board, he is not accepting it at all. Thus, we are again moving towards a global framework where everybody will be free to do what they want to do. India introduced the digital economy, then scrapped it because they wanted to implement pillar one and pillar two, and if pillar one and pillar two don’t come, India will have to go back to using unilateral methods.
India’s position, as such, has been that pillar one and pillar two should be introduced simultaneously, because these will give some revenues to India. However, I feel, even if pillar one is not introduced, India will go ahead and introduce pillar two–either from 2025 or 2026.
Pillar two essentially says that if you derive income in a country which is taxing you at less than 15% then you have a right to tax it in India. For example, if an Indian company has operations in UAE, and the rate of tax in UAE is 9% then India can tax you on the balance 6%. But that gain (for Indian revenue) may not be very significant. However, if pillar one is implemented, India will stand to gain very much.
Q. There have been discussions at international forums on taxing the super rich. Should India also explore a similar measure?
India had introduced two rates of surcharges for income above Rs 2 crore and Rs 5 crore. But in the last Budget (FY23), the higher surcharge on Rs 5 crore+income was removed. So effectively, the highest rate of tax, including surcharge, which was 42% has been brought down to 39%. According to me this is the correct rate.
Now the global move on the super rich is not really on the rate of taxation. That is to go back and say that, should the nations tax the super wealthy, high net worth individuals on the wealth that they have. So should India, for example, levy a wealth tax at the rate of half percent, 1% whatever, on the assets which you own. If you do it, will be a massive tax.
This is the proposal of OECD, which has not been implemented globally by many countries. They are hesitating to adopt the idea that because much of wealth is notional.
Additionally, when India originally had wealth tax, the amount of litigation over it was massive. The government came back to say that the cost of ministering wealth tax was more than the amount collected. Things have changed today. Wealth has gone up significantly, but India is a developing country where people are still creating wealth.