India’s direct tax reforms agenda: Simple and certain taxation more important than tax rates

Updated: January 11, 2020 9:02:41 AM

The new rates have catapulted India to a very competitive position against many of the OECD and BRICS countries, and neighbours like China, Indonesia and Philippines. Over time, the lower rates will reduce the cost of capital and catalyse investments.

India, direct tax, direct tax reform, Simple taxation, tax rate, OECD, BRICS Simplicity and certainty in taxation is valued by taxpayers even above the tax rates.

By Shalini Mathur 

For the tax world, 2019 has been a happening year as India responded to a multiplicity of challenges and dynamics at the domestic and global levels. Three significant drivers have shaped the tax policy in the past few months—the need to rev-up business sentiments and spur investments amidst concerns of a sub-5% economic growth for the first half of 2019-20, the OECD’s BEPS agenda altering the tax structures and legislations across jurisdictions and, most importantly, technology that is bringing in new business models, different supply chains and immense digital data, thus, impacting both tax policy and administration.

Unquestionably, the most defining development of 2019 was the slashing of corporate tax rates to 22% for all companies, and 15% for new manufacturing companies, in a trade-off for zero incentives and deductions. The new rates have catapulted India to a very competitive position against many of the OECD and BRICS countries, and neighbours like China, Indonesia and Philippines. Over time, the lower rates will reduce the cost of capital and catalyse investments.

As a supplementary measure, to truly bring down the effective tax burden on companies, the system of taxing dividends in the hands of the shareholders as per the applicable tax rate should be reintroduced. This system has the advantages of simplicity, transparency and equity. It also eliminates the problem of no-credit for foreign investors, thereby, making India a more competitive destination for investments. With the current dividend distribution tax, even after the rate cuts, a company bears a tax burden of 38% to 56%, depending on whether it is a non-subsidiary, and whether it pays the additional tax on dividends more than Rs 10 lakh.

Simplicity and certainty in taxation is valued by taxpayers even above the tax rates. In this context, multiplicity of capital gains tax rates is an area that deserves attention. The current law is highly complex due to inconsistent tax treatment of income, based on varied parameters such as holding period that ranges from 1-3 years, tax rates that range from 10% to 30% and allowing indexation only in respect of certain assets.

A major recent development is the OECD proposal on taxation of digital transactions. New profit allocation rules, nexus rules and implementation of new market jurisdiction taxing rights could lead to significant changes to the tax environment for MNEs. As a welcome step, the Indian authorities are holding consultations with businesses to evaluate the potential impact of these changes. More developments are expected in 2020 with the MLI/treaty amendments taking shape. India will need to guard against any unilateral measures that increase the risk of double taxation and multi-jurisdictional disputes.

Given the above, the role of robust dispute avoidance measures cannot be over-emphasised. Most jurisdictions have mechanisms such as private ruling and settlement mechanism to avoid litigation. India, too, may consider new mechanisms to prevent disputes. For instance, a mediation mechanism may be brought in, right at the assessment level, for high pitched assessments. A mediation panel may be constituted comprising experts like past ITAT members, retired IRS members, and direct tax professionals with relevant experience in mediation and special knowledge of direct taxes.

The mechanisms of Authority for Advance Rulings (AAR) and Advance Pricing Agreements (APAs) are the low hanging fruits for improving dispute avoidance. With more than 400 cases pending resolution, AAR has had limited success in reducing litigation due to structural and administrative reasons. Though APAs have been successful as a means of minimising litigation, with already 300 APAs signed despite it being a complex exercise, lack of capacity has slowed down the APA decisions. Capacity building for both AARs and APAs, supplemented by a new mechanism for private ruling will help taxpayers immensely.

In the recent years, the ministry of finance has taken a leap towards digitised tax administration. A pathbreaking initiative has been the implementation of anonymised, faceless e-assessments that deploy machine learning and artificial intelligence technologies to undertake risk-based audits. E-assessment will bring substantial ease to the taxpayer and minimise undesirable practises. Small businessmen/individual tax payers may not need the help of consultants to represent routine enquiries, which will help bring down their costs. Going forward, the taxpayers will need to equip themselves to provide crisper and focussed information that is easy to understand and not subject to misinterpretation. The tax department too will need to ensure a robust IT infrastructure to enable faceless assessments.
India has been ranked as one of the top-20 improvers in Doing Business 2020 by the World Bank. Here’s hoping that the new year brings in significant improvement in India’s current ranking of 151 out of 190 for ease of paying taxes.

Author is Director, Tax & Regulatory Services, EY India.
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