Vote on Account 2014: India envisaging significant tax reforms for future
Tax Partner, EY
Senior Tax Professional, EY
Tax policy forms an important component of India's fiscal policy. Apart from being an instrument of raising revenues, taxation laws play a key role in attaining larger fiscal objectives like, encouraging savings and investment, reducing inequalities of income and wealth, fostering balanced regional development, incentivizing exports and small-scale industries, etc.
However, in order to provide tax incentives for achieving vertical and horizontal equity and the above objectives, tax laws have been amended hundreds of times over the years, which has resulted in the tax laws becoming one of the most complex legislation in the country.
Significant amount of time and money are being employed both by taxpayers and government with billions of dollars in taxes getting locked up in long-drawn litigations. In the recent past, India has seen significant tax disputes in relation to cross border transactions and transfer pricing issues involving big multinationals, most of which have made headlines across the globe. As per the report, in financial year 2011-12, 30 companies comprising the Bombay Stock Exchange Sensex had approximately $7 billion blocked in litigation which is 27% higher than the amount of $5.5 billion reported during financial year 2010-11.
In a fast globalizing world, where countries are aiming at reducing import tariff barriers, India still has an inefficient indirect tax structure due to the cascading effect of multiple taxes on goods and services which affects cost of products and services. Levy of Central Sales Tax and Value Added Tax rates on the same goods continues to burden the dealer with multitude tax compliance and burn a hole in the consumer's pockets. Further, increased complexity of taxation laws has led to high compliance cost and litigation.
Vision 2020 as envisaged by the Indian Government involves formulation of a progressive tax policy, efficient and effective tax administration and improved voluntary compliance. This is slated to be achieved by an enabling policy environment and augmenting the revenue mobilization apparatus for optimum revenue collection under the law, while maintaining taxpayer confidence in the system.
Some of the measures that have been adopted is to increase reliance on indirect taxes especially service tax; increase withholding tax compliance; encourage voluntary compliance of tax laws and computerization of tax system coupled with noticeable enhancement in the working strength of tax departments. However, despite government efforts to improve tax design and administration, India's taxation policies remain complex and inefficient.
Few years back, two significant tax reforms were introduced by the Indian Government - Direct Tax Code (DTC) and Goods & Services Tax (GST). DTC, aimed at replacing the existing Income Tax Act, incorporated various provisions in line with the international taxation laws like GAAR, CFC regulations, taxation of indirect transfer of assets, investment based incentives, etc. Currently, DTC is still undergoing changes and is yet to be tabled in Parliament. The Indian Government has been trying to build consensus amongst political parties and states, for introducing GST, which will allow government to regulate taxing on goods and services, rather than the current system of state regulations, but without much success. Both the new legislation, DTC and GST, were viewed by the industry leaders as a much more progressive law and a game changer giving enormous boost to revenue collection. However, the Indian Government has been unable to implement DTC or GST so far.
As per recent media reports, with the national elections around the corner, political parties are aiming at taxation reforms. There has been talk of replacement of all direct and indirect taxes by expenditure / banking transaction tax. However, apprehensions have been expressed by industry associations about feasibility of such banking transaction tax and its implementation. The industry leaders have termed such radical tax reforms as untested and impractical solutions and suggest focusing implementation of long pending important reform i.e. DTC and GST.
Tax reforms and economic policies have had a dual advantage of accelerating growth and maximizing tax revenues. The need of the hour is to ensure significant tax reforms aimed at rationalizing the current tax structure are undertaken to enhance revenue by broadening tax payer base and improving transparency of regulatory framework. With Indian economy developing rapidly and foreign players targeting untapped Indian domestic market, its imperative for the new leadership to focus on bringing in simplification and rationalisation in tax system by eliminating unwanted complexities and multiplicity of taxes. Accordingly, if tax measures advocated by the industry bodies are endorsed by the government it will go a long way in augmenting the Government's coffers, encouraging growth in industrial output and increased investment by the foreign players.
Views expressed are personal