- Taxation is an important exercise for the economic and social development of the country.
- It provides the resources to use goods and services to the people.
- Various tax reform committees were constituted in India in 1971, 1977, but they suggested ad-hoc measures focused on the impending crisis.
- The Tax Reforms Committee of 1991 suggested a reduction in the rates of all major taxes, i.e., customs, individual, and corporate income and excise taxes to reasonable levels, maintaining progressivity.
ISSUeS WITH INDIA’S TAXATION SYSTeM
- Retrospective taxation has impacted the inflow of foreign capital to India.
- An unstable policy environment pertaining to tariffs and taxes needs to be resolved to boost business and investments ties.
- The complex web of taxation laws of the Central and many State Governments cause complexities and litigation.
- Increased threshold provided in case of personal income taxes and exemptions, tax cuts, preferential tax rates, deferral of tax liabilities etc. lead to a lower tax base.
- Tax evasion and corruption undermine the governance practices by the state.
- Weakness of tax administration such as lack of technical expertise and financial resources, poorly drafted laws and corruption.
- Structural issues such as low financial literacy, a large share of the informal economy and a large number of cash based transactions.
DIReCT TAX ReFORMS
- Direct tax is a progressive tax as the proportion of tax liability rises as an individual or entity’s income increases.
- Examples of direct taxes are income tax, corporate tax, dividend distribution tax, securities transaction tax, fringe benefits tax and wealth tax.
- Various committees such as Arbind Modi Committee on Income Tax Reforms and Akhilesh Ranjan Panel on formulating a new Direct Tax Code (DTC), aims to revise, consolidate and simplify the structure of direct tax laws (like Income-tax Act, 1961; Wealth Tax Act, 1957) in India into a single legislation
NeeD FOR DIReCT TAX ReFORMS
- Rationalization of income tax structure as the tax rate structure – slabs of 10%, 20% & 30% in personal income tax – has mostly remained the same in the last 20 years
- The urgency to simplify the corporate tax structure, for example in 2014-15, small companies having a profit of up to ₹1 cr paid an average tax rate of 29.37% while companies having a profit of greater than ₹500 cr paid an average tax rate of only 22.88%.
- Widen the tax base and prevent potential revenue loss due to lower tax rates and simplified tax structure.
- Maintain the balance between direct and indirect taxes, for instance, the contribution of direct taxes has declined from 60% in 2010-11 to 52% in 2017-18.
MeASUReS TAKeN BY THe GOVeRNMeNT
- Various initiatives were launched to increase tax compliance such as the E- Sahyog portal to facilitate online filing of the returns; extension of Indian Customs Single Window Interface for Facilitating Trade (SWIFT), etc.
- Simplification of tax laws such as specific class of persons exempted from the anti-abuse provisions of Section 50CA and Section 56 of the Income Tax
- Providing relief for startups with Capital gains exemptions from the sale of residential houses for investment in start-ups extended till FY21, resolving angel tax issues, etc.
- Providing various anti-tax avoidance measures such as Advanced Pricing Agreements (APAs), GAAR (General Anti-Avoidance Rules), etc.
DIReCT TAX CODe (DTC)
- It was envisioned to consolidate all direct tax laws of the central government and make the tax system more efficient and resilient.
- DTC intends to bring horizontal equity among different classes of taxpayers in line with best international practices.
- It will help to phase out the multiplicity of tax exemptions and deductions in order to widen and deepen the tax base.
- Such tax reforms will increase compliance, therefore simpler tax lead to a stable and robust taxation system.
PROPOSAL FOR DIReCT TAX CODe (DTC)
- The government adopted the proposed increased tax slabs in the financial year 2012 – 2013.
- Corporate Income Tax should be 30% with no surcharge on corporate tax.
- The Minimum Alternate Tax (MAT) rate should be 20% from the earlier tax rate of 18.5%.
- Few schemes like PF, Gratuity, pension funds, etc would still come under EEE.
VIVAD Se VISHWAS SCHeMe
- This scheme was enacted with the goal to reduce pending income tax litigation, generating timely revenue for the government and benefiting
- The individuals/companies that opt for the scheme are required to pay a requisite tax following which all litigation against them are closed by the tax department and penal proceedings are also dropped.
FACeLeSS TAX ASSeSSMeNT SCHeMe
- A taxpayer or an assessee is not required to visit an I-T department office or meet a department official for income tax-related businesses.
- It was launched in 2019 to promote an efficient and effective tax administration, minimizing physical interface, increasing accountability and introducing of team-based assessments.
INDIReCT TAX FRAMeWORK
- Indirect taxes are consumption-based taxes that are applied to goods or services when they are bought and sold.
- The government receives indirect tax payments from the seller of the good/service, the seller, in turn, passes the tax on to the end-user i.e. buyer of the good/service.
- Examples of indirect taxes are goods and services tax, customs duty, excise duty, sales tax, etc.
GOODS AND SeRVICeS TAX (GST)
- This indirect tax system was introduced to collect and reduce tax evasion, is easy to understand for the customer and will reduce the tax burden for industry, it ensures that there is no cascading effect of the tax and there is the harmonization of tax laws, procedures, and rates of tax.
- GST is applicable to the supply of goods or services as compared to the manufacture of goods or on sale of goods or on the provision of services.
ReCeNT MeASUReS BY THe GOVeRNMeNT
- Taxation Laws (Amendment) Ordinance 2019 provided a concessional tax regime of 22% for all existing domestic companies from FY 2019-20 if they do not avail any specified exemption or incentive.
- Taxation Laws (Amendment) Ordinance 2019 has led to a reduction of the tax rate to 15% for new manufacturing domestic companies if such company does not avail any specified exemption or incentive
- The rate of MAT has also been reduced from 5% to 15%
- The Finance Act, 2020 removed the Dividend Distribution Tax (DDT) under which the companies are not required to pay DDT.