Taxes have been a focus areas and a major reform on the tax side was transformation in indirect taxes with the GST, which subsumed within its ambit 17 state and central indirect levies.
“The nation should have a tax system that looks like someone designed it on purpose”—William Simon.
With a stable government at the Centre, stage is set for introduction of reforms needed to put the economy back on high growth trajectory. The NDA, in its previous term, demonstrated resolve to push through bold reforms as well as discard old laws. Taxes have been a focus areas and a major reform on the tax side was transformation in indirect taxes with the GST, which subsumed within its ambit 17 state and central indirect levies. On the direct tax side, the Wealth Tax Act, 1957, was scrapped and a panel constituted in November 2017 to rewrite the existing Income-tax Act. The panel is expected to submit a report to the government by July 31, 2019. In the Union Budget on July 5, it is expected that a framework for introduction of the direct taxes code (DTC) will be laid down.
The Income-tax Act was introduced in 1961, but has failed to keep pace with evolving businesses and a fast-growing economy. Some instances in the past have highlighted deficiencies in this Act to bring to tax certain transactions that the government intended to tax. Another example is of digital businesses, which can potentially result in significant tax leakages and has also been focused upon by the OECD in its Action Plan-1 on Base Erosion and Profit Shifting project.
While the government has tried to keep the Income-tax Act at pace with evolving business realities by bringing in suitable amendments—taxation of indirect transfers of Indian entities, equalisation levy on online advertisements, thin capitalisation rules, GAAR and certain other provisions through annual fiscal budgets—the provisions seem to have been rushed into existing overall schemes of the Act (except for equalisation levy that is outside its scope) and, thus, have led to interpretational issues, leading to potential for serious tax litigation. Transformation of the Income-tax Act into a new tax regime that is aligned with current economic realities and modern businesses is the need of the hour.
DTC is an attempt to make it a concise, coherent and consolidated direct tax structure. The UPA had also attempted to bring in DTC and introduced the first draft Bill in 2009 and a revised version in 2014, but the idea of DTC was shelved shortly after the change of government.
The economy is going through a rough patch. Introduction of tax incentives and cutting tax rates have been used as a tool to reignite growth—India has one of the highest corporate tax rates amongst big economies. DTC is an opportunity to rationalise tax rates as well as introduce provisions to incentivise high-growth sectors such as IT/ITeS, retail, e-commerce, etc. Further, given the minuscule amount of R&D in India and its relative importance, there have to be incentives for R&D activities as well as simplifying existing incentives such as preferential tax rates for income from exploitation of patents developed in India. Providing certainty to foreign and domestic investors by minimising tax litigation is another focus area for DTC. Although we have the Authority for Advance Rulings, its attractiveness for obtaining tax certainty has reduced, largely due to many AAR applications pending for disposal, courtesy the lack of administrative capacity to handle the number of applications being filed and AAR being non-functional for most part of the year. DTC should address this by adopting a comprehensive dispute resolution method by bringing in an advance authorisation process. For example, in many countries, tax authorities generally answer inquiries made by taxpayers even without a formal ruling procedure, and in others there is advance statutory back-up procedure for pronouncing such rulings.
DTC should incorporate certain other practices, too. One such is the provision in the US tax law that provides for joint filing of returns by married couples, which leads to both reduction in taxes and compliance for taxpayers. In Singapore, information for salaried employees is auto-included while filing tax returns, and requires only validation, making the exercise of submitting a tax return quicker and simpler.
DTC is going to be one of the most important tax legislations as it will replace not just the Income-tax Act, but also possibly tax jurisprudence of the last 60-odd years. As has been witnessed in the past, hurriedly-drafted tax provisions serve neither the taxpayers nor tax officials well, and hence the government would do well not to rush early introduction of DTC but allow adequate time to both legislators to draft and stakeholders to debate the new law. The requirement of a new direct tax regime is real and immediate.