Interim budget: A look at the last decade of direct tax
Partner & National Leader, International Tax Services, EY
The exceptional growth spurred by globalization of the Indian economy and the subsequent economic crisis have defined the last decade in the realm of direct taxes in India.
With intent to rein in the fiscal deficit and provide the necessary stimuli to spark economic growth, India, like most emerging markets, has undertaken significant direct tax reforms in the past decade to rationalize tax policy and provide efficient and effective tax administration. The last decade has seen a plethora of tax amendments in the form of introduction of new provisions and policy changes for better administration, compliance, enforcement and widening of the tax base. However, the same has resulted in multiple controversies, lack of certainty and consistency in tax policy as well as administration.
To widen the tax net and to align with the global tax regime, new taxes such as fringe benefit tax (FBT), securities transaction tax (STT) and banking cash transaction tax (BCTT) were introduced. Further, to combat tax avoidance, which has arisen as an area of concern in the face of aggressive tax planning, general anti-avoidance rules (GAAR) and various transaction-specific anti-avoidance rules (SAAR) in the form of domestic and international transfer-pricing regulations and retrospective amendments to tax indirect transfer of assets located in India, software and royalty payments were also introduced.
Further, tax treaties are being renegotiated to introduce limitation of benefits clause and exchange of information clause to enable exchange of banking information and use of information for non-tax purposes as well. While FBT and BCTT resulted in additional compliances and tax administration cost, without significant increase in revenue, leading to their abolishment, the proposed GAAR regulations and retrospective amendments are widely envisioned to enhance the tax revenue.
Also, to prevent generation and circulation of unaccounted for money across jurisdictions, provisions have been incorporated to discourage transactions with foreign jurisdictions which do not effectively exchange information with India and to tax gifts received from unrelated parties for inadequate consideration. Section 50C of the Income Tax Act was also introduced to provide adopting stamp duty value of a property transaction for purposes of computing capital gains. In addition, various reforms in the form of annual information return (AIR), widening the withholding tax provisions measures and mandatory quoting of PAN (permanent account number) for commercial transactions have been introduced to increase tax compliances, widen the tax base and curb tax leakages.
In an effort to facilitate effective tax administration, information technology has been widely used to computerize various processes (electronic tax payments, e-filings of tax returns and certificates). While e-governance initiatives in the form of centralized processing centres and exchange of information through AIR have ushered in a new age of information technology-enabled tax administration, this could not achieve efficient processing of tax returns and refunds.
This decade has also seen a major initiative in the form of direct taxes code (DTC), which is proposed to be introduced to replace the current Indian tax law. DTC is being considered in a bid to consolidate laws and regulations relating to all direct taxes and establish a tax system which may discourage taxpayers from resorting to tax avoidance schemes in line with the best international practices. DTC is structured to facilitate frequent amendments without much ado to accommodate the ever increasing needs of India’s dynamic economy. Despite significant engagement between the policymakers and the industry for much debated and deliberate changes, DTC is yet to see the light of the day. We have to wait to watch how it would be taken by the new government from where it has been left.
The government, in consideration of the impact of certain controversial tax provisions and actions by tax authorities on overall investment and business climate, has formed various committees to address the concerns of the investors. Given that international tax and transfer pricing have emerged as key areas of high pitched tax litigation in recent years, the government has introduced advance pricing agreements (APAs) and safe harbour rules to provide an alternative remedy to costly and long-drawn transfer pricing disputes in India. This move was welcomed by investors and is expected to provide some certainty on transfer pricing litigations.
Overall, the last decade has seen an evolution in the Indian direct tax system with significant changes in the tax policy towards increasing tax revenues while seeking to remain competitively and politically prudent. Such prudence aside, what has been illustrated is the clear commitment to stronger enforcement of existing tax laws which gives rise to more compliances and associated controversies and disputes. Like in any election year, the Interim Finance Bill presented by the finance minister on 17 February has maintained the status quo.
Views expressed are personal.