In presenting the last substantive budget before next year’s general elections, the government has a great opportunity before it to introduce far-reaching reforms. Despite several countries facing economic headwinds, India is perhaps uniquely positioned to leverage on the many global opportunities that exist in the post-pandemic world. Tax policy has an important role to play in this regard, and there are various steps that the government can consider to boost savings, investment, and growth in the economy.
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As always, tax rates are central to this exercise, and with buoyant tax collections in the current fiscal year, the government may have the necessary headroom to provide relief to individuals. Changes to the basic exemption limit will be welcome, considering that these have not undergone a revision since FY15. This will also be a logical sequel to the successful corporate tax cuts of 2019 and will help stimulate demand and savings in the economy. There is also a case to be made for extending the corporate rate cuts to Limited Liability Partnerships as well as foreign companies who have a presence in India.
Newly set-up companies are now required to commence manufacturing activities by March 31, 2024 to qualify for the extremely attractive 15% corporate tax rate. While this deadline is itself a revised deadline introduced last year in light of the pandemic, a further extension may be justified considering recent disruptions to the global supply chain.
Implementation of the Global Minimum Tax Rules under the OECD’s Pillar 2 initiative is another area which is being closely monitored by many businesses. It would be helpful for the finance minister to announce a timeline for their implementation and initiate a process of public consultation in this regard. The impact of these rules on the tax concessions offered to IFSC units will also need to be considered. These rules could affect the overall attractiveness of the IFSC regime, especially for foreign investors in the IFSC who do not have a presence elsewhere in India.
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In the recent past, several initiatives have been launched in the field of tax dispute resolution. These include enhancement of monetary limits for departmental appeals, introduction of faceless proceedings, overhauling the advance ruling mechanism, setting up local committees to deal with taxpayer grievances, establishment of dispute resolution committees, and others. Despite these, tax disputes continue to remain an area of concern for both domestic and foreign taxpayers. There is perhaps a need for a comprehensive rethink of India’s approach to dispute resolution, which should focus, among other things, on dispute prevention, ensuring consistency, adherence to strict timelines, and on training and capacity building across levels. With GST finishing five years in India, there are several interpretation differences that arose between the field formations and taxpayers from the time of its introduction when it was a nascent law and till date where GST has evolved to a fairly complex legal framework, with multiple amendments through notifications and circulars. Thus, an opportunity should be provided to taxpayers to settle such disputes through amnesty schemes. In the same context, some clarity and detailed guidelines on initiation of prosecution under the GST laws is also welcome, an uncontrolled exercise of prosecution power needs to be controlled.
Enabling negotiated settlement of tax disputes is another important measure for the government to consider. This has been successfully implemented by many countries, and India could implement this, at least on a trial basis for individual taxpayers and for smaller disputes. To be effective, this mechanism must cover the quantum of tax, interest as well as penalties. In fact, under GST, there have been various divergent views/rulings (AAR) across various states regarding taxability of transactions, applicable tax rates, etc. The government could consider resolving such industry-wide issues by instituting a centralised appellate authority, which will help in establishing consistent positions across all states on various matters.
Most countries impose wide-ranging withholding taxes on payments made to non-residents but limit domestic withholding to salaries and perhaps one or two other payments. This approach may, of course, not be feasible in India today in light of our low tax-GDP ratio and our compliance levels. Having said this, the last few years have seen a steady expansion of the scope of domestic withholding provisions. And although there may be a policy justification for each such provision, taken in totality, businesses are facing increased challenges on this front. To partly alleviate this burden, the government could consider bringing in greater uniformity in TDS rates, which could be achieved through reduction in many applicable rates.
A key feature of domestic TDS is that it usually applies only to specific and easily identifiable payments (such as salaries, rent, royalties, commission etc). In contrast, TDS on ‘benefits and perquisites arising from business’, which was introduced last year is, on the face of it, extremely open-ended. Experience over the past year has shown that this provision is practically very difficult to apply given its scope and the wide diversity in business practices across sectors. Hence, there is a need to reconsider the need for TDS on such a broad, open-ended item. The government could consider limiting this to an identified list of benefits and perquisites, with the government retaining the power to expand the list from time to time, if needed.
Some changes are also required to the customs regime. For instance, the current advance ruling mechanism for customs can help facilitate trade and provide clarity to businesses. To ensure uniform implementation and enforcement, these rulings should be made applicable throughout India, and not be limited to select commissionerates. Similarly, relaxation in the rules governing post clearance amendments to documents and enabling the acceptance of surety bonds in place of bank guarantees should also be considered.
Under GST laws, key decisions on taxability and legislative amendments are taken by the GST Council on a regular basis all around the year; however, there are prospects and opportunities to rationalise tax rates, credit eligibility, and facilitation measures for easing GST compliances for taxpayers. The industry is also awaiting clarity on taxability of certain issues under GST such as taxability of crypto currencies and online gaming transactions. Clarity on these points would be welcome.
(The author is Head of Tax, KPMG in India)
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