The draft tax code is the outcome of a compelling need for change. It is the product of almost three years of intensive efforts by policymakers and their draftsmen. Initial feedback clearly suggests that it represents a vast improvement over the present tax code. The survey feedback shows that all stakeholders—individuals, businesses—whether Indian business houses, public sector undertakings or multinational companies—echo the sentiment.
Competitiveness of the tax system
The tax framework is an important consideration for businesses in measuring the relative competitiveness of an investment destination. Governments, on the other hand, require steady and sustainable streams of revenue to finance infrastructure, education and social welfare programmes. Indian businesses and multinational companies have carried a perception of excesses by the tax administration, particularly in the past few years.
Simplicity is key
A sustainable direct tax system needs to be more than a simple means of raising revenue. Adam Smith outlined four canons of taxation: ability to pay, convenience, clarity and certainty, and least expensive to collect.
Besides simplicity, businesses need a non-excessive administration in compliance costs, coupled with ease in decision-making for expansion, and one that’s competitive enough to allow them to operate effectively in international markets.
Our tax system has become too onerous and complex for businesses. Piecemeal changes to the existing system added to the challenge. The change obviously could not have come overnight and it had to be calibrated, marking the culmination of efforts to put together a modern tax code. A 1,000-odd page maze of uncertainty is set to be replaced by a new code that is leaner, simpler, logically organized and aimed at reducing litigation.
Delivering on promises
Material reduction in corporate tax rates, coupled with a paradigm shift in profit-linked tax incentives, has produced an interesting survey outcome. Successive expert group recommendations to end tax incentives seem to have been adopted in full.
We wonder why individual tax rates are not aligned to corporate and partnership rates, a variance from expert group recommendations. It seems that rejigging of tax rates coupled with the EET (exempt-exempt-tax) scheme is aimed at benefiting low- and middle-income groups. Let’s wait and access the impact of capital gains tax exemption on listed securities.
India, in pursuit of protecting its tax base, shall embrace legislating anti-avoidance provisions and broad-basing of “control and management” test felt inevitable by policymakers. Further, domestic law overriding the treaty is a bold move and is likely to meet resistance from treaty partners. These are not just signs of an emerging economy, but an economic superpower, and policymakers seem to be serious about enforcing its right to tax economic activities that otherwise are mired in controversy under the extant law. However, it would be prudent to adopt caution in administering them. In the years ahead, as India continues to attract increased capital flows, as its international trade expands and the web of trade and tax conventions grows, our tax competitiveness will be watched by the world.
Our overall assessment is that the proposals are not a la carte menu, from which individual items (that suit businesses) can be cherry-picked, but an integrated package. The code is designed to ensure that in the coming decades, India embraces a tax system that is world class, such that we become competitive from a business tax standpoint. But for that to happen, both taxpayers and tax collectors have to work with a spirit of partnership and look to the future.
Mukesh Butani is partner, BMR Advisors. Respond to this column at firstname.lastname@example.org