Tax policy of India @ 75
The present government has brought stability to tax policies. In the next five years, a few features could be added to these policies
Income tax was introduced by the British in 1922 as a supposedly “temporary” measure to augment depleted revenues after World War I. The tax remained through the years leading to Independence and the income tax law was overhauled for the first time since Independence in 1962. Along with income tax, in due course there came capital gains tax, wealth tax, gift tax and estate duty. The structure and rates of taxation under these laws were heavily influenced by socialist philosophy. High to very high tax rates were accompanied by a plethora of complicated exemptions and deductions, leading to poor compliance, corruption, tax avoidance arrangements, protracted litigation and frustration for honest taxpayers. At its peak, this strand of tax policy resulted in a maximum marginal personal income rate of 97 per cent topped off by a five per cent wealth tax.
The first major intent to reform tax laws was laid out by the Rajiv Gandhi government. V P Singh, the then finance minister (around 1987) unveiled a LongTerm Fiscal Policy simplifying various exemptions and laying down a direction for more moderate rates of taxation. This was the precursor to the now well-known liberalised regime of P V Narasimha Rao, whose finance minister Manmohan Singh started a procession of Budgets, further rationalising tax rates (especially, indirect taxes). In 1994, service tax was introduced in a tentative manner, covering very few services. The turning point was P Chidambaram’s “dream Budget” (around 1997) under the H D Deve Gowda government. It radically slashed income tax rates and set a firm path of moderate tax system in India that has remained so in the last two decades.
Near the turn of the century, under the Atal Bihar Vajpayee-led National Democratic Alliance (NDA) government, then finance minister Yashwant Sinha brought about further tax reforms, especially rationalising the myriad slabs of excise duties. It was during the NDA government that the seeds of tax reforms such as goods and services tax and further rationalisation of income tax were sown through the formation of the Kelkar Committee. This trajectory of moderate tax policies and “incremental” tinkering with tax laws continued during the first term of the United Progressive Alliance regime that followed the NDA in 2004. However, the nemesis and root cause of what came to be known as “tax terrorism” was planted during the tenure of finance minister Pranab Mukherjee, in his Budget of 2012. That Budget saw the introduction of the ill-fated retrospective tax on indirect transfers after the Supreme Court had ruled favourably on the matter. That Budget had a record number of retrospective amendments, which made one believe that a certain kind of hubris had set in the polity of India where the smug wisdom was that it was “entitled” to grow come what may.
The key features of the Indian tax system, namely complexity in law, discretionary powers of tax authorities, protracted litigation and a plethora of exemptions and deductions, leading to effective rates of tax being much lower than the statutory rates, remained largely unchanged. The present The Narendra Modi government made its intent clear during the election campaign, namely removal of tax terrorism and bringing about stability and certainty in tax policies. To its credit, there have been virtually no major retrospective amendments in the four Budgets presented by Finance Minister Arun Jaitley. Also, there have been demonstrable efforts in issuing a huge number of administrative clarifications so as to avoid protracted litigation. In several cases the government decided to close litigation by not appealing to higher judicial forums, where it felt that its position was no longer tenable. Then, we saw the “surgical strikes” to enhance the tax base through measures such as demonetisation, amnesty schemes, legislative measures, signing of information-sharing agreements with several countries and anti-evasion and transparency measures like General Anti- Avoidance Rules and Base Erosion and Profit Shift action points.
Two areas of concern remain: One, discretion to tax authorities, which despite the best of efforts, continues to creep into newer legislative provisions; second, the drafting of laws, which still leads to multiple interpretations and scope for avoidable litigation. The future Tax policy in India @ 70 has matured from the days post Independence. In keeping with the resolve and energy of this government, it would be nice to see India @ 75 with the following features:
Tax-GDP ratio: A significant expansion of tax base propelled by demonetisation, GST and the use of data analytics by the tax administration should result in an increase in India’s total taxto-GDP ratio (Centre and states) from the current level of 16.6 per cent to 20 per cent. This will bring India on a par with China and Mexico.
Corporate tax rate (CTR): There should be considerable scaling down of the plethora of exemptions and deductions. This should enable a “clean” CTR of 25 per cent (without any surcharges) and removal of the dividend distribution tax. It would be far better to revert to a “classical” system of dividend taxation, wherein individual shareholders (earning dividend income above a particular limit) are taxable.
Share of personal income tax (PIT): While there is a steady growth in individual taxpayers, India’s PIT share of GDP is quite low (only seven taxpayers for every 100 voters). Brazil and Turkey have twice the share of PIT revenues being contributed by India. India needs to significantly increase its share of PIT to GDP from the current low of two per cent to at least four or five per cent.
Digital tax administration: Mexico has shown the way by becoming a “Level 4” digital tax administration. This requires 100 per cent compliance with maintenance and transmission of tax as well as detailed transactional information in an electronic format. Using this detailed transactional data, the Mexican tax authority performs realtime analysis and issues e-audits and assessments. With increasing focus on Digital India, India should be looking to become a “Level 5” tax administration with “e-matches” (of data from myriad sources), “e-audits” (electronic audits) and “e-assess” (tax authority using submitted data to send an “e assessment” to the taxpayer).
Rationalisation of GST rates: There should be no more than three slabs of GST rates and complete harmony of rates between various components in the supply chain and finished products. Further, a majority of items should fall under the 12 per cent rate. This will go a long way in facilitating an incremental growth in GDP of 1.5-2 per cent due to GST.