The Covid 19 crisis is an opportunity to redefine tax policy and law. A calibrated approach to balance welfare economics with a vision to pioneer economic activity and national growth is needed.
History is a vast early warning system, says one popular quote. Two major laws, income-tax and customs were legislated during the national emergency in 1962. They have stood the test of time, revealing that the best policy measure evolves when human minds are sharpest and there is coordinated action, seeking light in chaos. The current crisis, as it settles, will draw a renewed attention of policymakers on tax revenue mobilisation and its impact will drive areas of government expenditure and fiscal stimulus to businesses. Perhaps it is an opportune moment to think of key tax reforms that could yield an impactful outcome. Here are a few suggestions.
A radical, yet compelling, move is to rewrite the tax law paradigm. Consider two separate legislations. The first, either in the current or the new tax code, will enlist the broad principles on which the detailed tax law is based, which is the legislated tax policy. The second will be tax law that must be interpreted considering the former. The current approach of the statute is that it is the reference point for both the law and the legislative intent, owing to which interpretation-linked disputes arise and require the courts to fine-comb the law. A principle-led approach to appreciate the contours of the tax law will curtail disputes; the taxpayer would be dissuaded from assigning an incongruent meaning to the law and equally the tax administration would be estopped from contending that its underlying intent was different.
But why this radical reform is the need of the hour? The answer simply lies in experience. The law today, due to many reasons, including incoherent drafting and target-driven approach of the administration, discourages most business enterprises and instead promotes taxpayers to resort to tax mitigation and at times evasive approaches, which enhances litigation.
The policy today is a complex mesh of varied and often competing objectives. For instance, specifically directed tax incentives, say SEZs and manufacturing-linked corporate tax rates. Tax exemption provisions witness most disputes and varying tax rates give opportunities for business to reorganise their affairs. At the same time, the tax law is replete with ominous anti-avoidance provisions, such as GAAR, and the past decade has witnessed plethora of specific anti-avoidance (also called SAAR) provisions, whose only purpose is to deter business from resorting to tax-mitigation measures.
An inherent inter se tension between such competing stances manifests itself in tax litigation, which overwhelms all the three branches of the state-executive, legislative and judicial-consuming massive time and resource costs of taxpayers, besides resulting in an ineffective system. Is such a situation avoidable? Perhaps, a qualified yes, or even a tacit no, as in a large measure it is contingent upon the lawmakers, who play the role of both the script director and a major actor.
The long-term fiscal policy of 1985, a first major attempt in the pre-economic reforms era, replete with enviable propositions, is forgotten in the liberalisation zeal. Rationalisation of tax rates mooted three decades ago is still relevant. With innovative suggestions such as a national tax court, a comprehensive tax-policy rewrite is the need for the hour; one resulting into a coherent tax law which de-hyphenates businesses from opportunistic tax-motivated manoeuvres.
On the corporate tax front, let there be only three tax rates: 15% for MSMEs, 18% for manufacturing business and 20% for all others, with no room for any form of tax holiday. The suggestion may sound strange in an environment where the government’s tax revenues are already under stress and with the health crisis it will merely get accentuated. An underlying objective here is simplicity, which in our view will obviate most disputes and low tax-incidence will reinvigorate business sentiment.
As a measure to overcome immediate needs, a surcharge/cess not exceeding 10% can be considered, with a provision for carry back of losses, such that businesses reeling under losses are able to recoup. Such provisions should be one-off in nature, say, applicable for 2-3 years. For individual taxpayers, other than businesses, a maximum marginal rate of 25% with no tax below annual income of Rs 8 lakh shall address the hardship factor and instil the capacity-to-pay principle, besides moderate tax rates. Needless to mention, there should be no scope for other forms of surcharge/cess for individual taxpayers.
The revenue foregone from liberal rates for businesses and individuals should be addressed by omitting all exemptions. With political will, it is time to bring agricultural income within the scope of tax. As a start, rich farmers with income above `1 crore be taxed. Since this will require a constitutional amendment with the support of states, let the entire proceeds of such collections devolve upon states, as quid pro quo. This will also reduce devolution commitment of the Union. The sense of inequitable treatment will be addressed that emanates from this sector getting the largesse of farm-loan incentives without tax obligations. Indeed, there is no economic rationale for keeping away such large earners outside the tax basket.
These changes will de-clutter the administration’s time and space from regular annual amendments unless they are essential. More importantly, the administration’s focus shall significantly move away from enforcement and appellate functioning, leaving space to focus on technology, policy and taxpayer service. Faceless/e-assessment coupled with taxpayers’ charter are a good start, but to make them effective, these must be backed with a change in mindset and investment in technology and rigorous training.
It’s time for India to embrace the principles of cooperative compliance by virtue of which the taxpayer is treated as a customer and partner in nation-building. The concept of such compliance has worked successfully in most parts of Continental Europe and in parts of Asia, which were historically known for provocative and aggressive tax administration. Besides, the customer-guiding philosophy that India will hopefully embrace as part of the taxpayers’ charter, its success, besides a paradigm shift, will be measured with stability in tax policy, infrequent shifting-of-goalposts in the law, and timely dispute resolution mechanisms. Let a commissioner-level rank person be allocated to each large business enterprise, say, country’s top 200 taxpayers.
Likewise, additional, deputy and assistant commissioners be allocated to a group of other taxpayers under cooperative compliance function. Similarly, let there be stratification of taxpayers like large corporates, MSMEs, individuals and others. The degree of taxpayer services for businesses should be similar to the focus given for individuals, assessment and refund mechanism, which have been largely streamlined in the recent years.
These officers should be reskilled from the mindset of ‘assessing’ to ‘assist’, who will work with taxpayers in collaborative fashion to proactively fulfil compliance requirement, address contentious positions and thus avoid glaring tax controversies. In this paradigm, limited resources should be allocated for assessment or audit, which must be aligned to the faceless/e-assessment route scheme. Even limited resources should be allocated for enforcement function, dealing with search and investigation cases.
Finally, an independent appellate functioning of the department (commissioner, Appeals) should be supplemented with a mechanism to settle disputes via a collegium of senior officials in the department of revenue and not via filed officials, due to inherent conflicts. Such collegium should be empowered to compromise/settle a dispute under the overall supervision of CBDT and not subjected to any vigilance oversight to ensure smooth decision-making. This will ensure that select cases of disagreement will trigger a dispute, unlike discretionary positions of assessments. All of this will entail material change in (re)allocation of work and skills, particularly at the level of commissioner and above, without which change will be meaningless.
Changed times offer an opportunity to usher in overdue administrative reforms, which is even more time-critical as businesses recover from the shock and view them as an avenue for incentivising economic growth. Equally, it should not dither the government from pursuing its goal to garner tax revenues for addressing rising demands from social commitments by balancing needs of the business. A calibrated approach to balance welfare economics with a vision to pioneer economic activity and national growth is needed. Such balance is tricky, but cannot be shied away by any nation and policymakers ought to display a crisis-driven change that will build a stronger and resilient India.