Alongside legislative changes, there is also a strong need for training the revenue officers in both the taxation systems since both taxes are an integral part of business taxation. National tax academies at Faridabad (NACIN) and Nagpur (NADT) are already doing this, but the scope can be further widened, especially since GST is a new law.
By Sumit Garg and Keshav Choudhary
In his keynote address at a recent media event, PM Narendra Modi highlighted concerns about the low levels of tax compliance in India. He also emphasised that the tax administration is moving from being process-centric to citizen-centric, citing direct tax reforms such as a faceless scrutiny process and lowering of tax rates. Given the government’s focus on effective tax governance, there’s a need to make a case for viewing the tax system in a holistic manner. Synergies between both the direct and indirect tax administrations can be harnessed to bring in greater simplicity, efficiency, and tax compliance.
The first area where greater synergy can be attained is cross-border trade transactions between a parent MNC and its related parties. Think of a situation where an Indian subsidiary imports goods or services from its parent entity located abroad. Both direct tax (income tax) and indirect tax (customs and GST) offices must arrive at an arms-length price of the transaction (transfer pricing) between the related parties to do their respective tax assessments. There is a conflict here. The income tax officer would look at the transaction with the suspicion that much of the price has been transferred by the Indian subsidiary to its parent MNC. If the officer is not convinced with the argument of the Indian subsidiary, she will adjust the transaction price in a manner such that more profit is attributed to the Indian subsidiary, and, therefore, adjust the price downwards. However, the customs officer, at the same time, in her best judgement and to safeguard the revenue will like to adjust the same price upwards so that the base for charging the customs duty and GST increases. In both the situations, the goal is the same, i.e, determination of the correct transaction value. Since the two departments work separately, the methodologies differ, which leads to litigation, and also enhances the cost for the business. In fact, transfer pricing orders from income tax are often produced before customs authorities to contest valuations and vice versa. Better coordination between CBDT and CBIC can go a long way in arriving at a fair valuation for such transactions, thereby giving greater tax certainty to businesses.
Further, under the convention on Mutual Administrative Assistance in Tax Matters, which India has ratified, 136 countries cooperate to tackle tax evasion and avoidance. This multilateral instrument includes exchange of information on income tax matters, and is administered by the Foreign Tax division (FT&TR) of the CBDT. At the same time, countries share customs information via Customs Mutual Assistance Agreements (CMAA). However, there is a lack of an effective information sharing mechanism pertaining to VAT/GST. Incorporating provisions for exchange of information in such matters alongside existing income tax provisions can be useful in preventing GST avoidance and evasion, especially in online purchase of services such as entertainment, e-journals, etc, by Indian consumers—a rapidly growing area.
E-commerce is another area where synergies exist. Sellers on platforms such as Amazon, Flipkart, Myntra, etc, have benefitted from increase in market access. From the tax officer’s point of view, there is a situation now where the sellers who may not have been tax-compliant earlier now leave a trail behind when they do business through such platforms. Capturing such sales are important for both the tax departments, for widening the tax base. Under GST, e-commerce operators have been made liable to deduct 1% GST as TCS on the payments made by platforms to the sellers. The consolidated TCS statement is then to be filed on the GSTN portal in the form of a GSTR-8 return. Since capturing the true incomes of these sellers is an area of concern for the income tax authorities as well, Budget 2020 has amended the Income Tax Act and introduced a new section, 194-O, that requires e-commerce operators to deduct TDS of 1% while making payments to sellers. Here, again, there is a scope to unify the two processes at the level of the e-commerce operators. Furthermore, cross-verification of this data between the two administrations can also prevent misreporting and evasion of taxes by sellers.
The case for lowering compliance burden is the strongest for small businesses. Both the GST and the income tax law recognise this and have made provisions for small businesses. Under the GST, the composition scheme has been created to allow taxpayers having turnover of up to `1.5 crore to pay GST of 1% on the annual turnover, with no input tax credit, by filing an annual GSTR-4 return (payments are quarterly). The I-T Act provides for a similar scheme of presumptive taxation, where small taxpayers are taxed at 6% or 8% of turnover, depending on the situation. Once again, there is scope for unifying these processes to ease the burden on the taxpayer since both administrations impose a similar tax on a similar class of taxpayers.
Several other examples can be found where better coordination between CBDT and CBIC can yield more efficient outcomes. Carrying out such unification is easier said than done. Both the GST law and the Income Tax Act have their own administrative mechanisms, thresholds, and exemptions, and many legislative changes would be required. Yet, a start has already been made in this direction. The Finance Bill 2020 recognises that the problem of fraudulent input tax credit claims using fake invoices has implications not only for evasion of GST but income tax as well. The new section 271AAD of the Income Tax Act, therefore, proposes to levy a penalty if such fake invoices are detected during income tax proceedings, creating a cross-linkage between GST and income tax. Legal protocols for data sharing between CBDT and CBIC are also in operation, which will help tackle misreporting by taxpayers.
Alongside legislative changes, there is also a strong need for training revenue officers in both the taxation systems since both taxes are an integral part of business taxation. National tax academies at Faridabad (NACIN) and Nagpur (NADT) are already doing this, but the scope can be further widened, especially since GST is a new law. Such measures will go a long way in creating an equitable, simple, and efficient tax administration, in line with the prime minister’s vision.
Garg is an IRS officer from CBIC. Choudhary is an IRS officer from CBDT. Views are personal