Corporate tax collections in the current fiscal have shown healthy growth, and one of the theories being discussed is whether this is an outcome of better compliance resulting from a planned decrease in the rate of corporate tax. Indeed, in a country like ours, this is an interesting and obvious hypothesis to make, considering the several reports on the huge amounts of black money stashed away and, more recently, some intriguing data on the size and scale of the Indian mafia that operates in several large states across the country.
India, like many other countries in the world, operates in an environment where the statutory tax rate is very different from the effective tax rates that companies pay. Over the last decade, while the government has made a visible and concerted effort to reduce the multiplicity of tax holidays and incentives, tax law has a complex matrix of provisions that enable companies to enjoy several deductions and benefits. As a result, effective taxes that companies pay are in several cases half the statutory rate. The proposed direct taxes code will take away many more of the remaining tax incentives. However, the government proposes to stay with the same headline tax rate of 30%, although without any surcharge and cess, at least for now—a rollback from the bold 25% tax rate that was originally proposed.
So what is causing the robust growth in tax collections—is it the relatively lower headline rates of tax, or is it the effective tax rates that companies are able to enjoy? And, is there a role that the tax administration is playing in facilitating higher collections?
I would submit that India remains one of the most complex and cumbersome environments to discharge one’s tax burdens. Several changes have been made to ease the physical aspects of tax compliance—starting from e-filing to not having to submit reams of tax-deduction certificates with the return. This, however, is just basic hygiene. The complexity arises from the huge uncertainties corporate firms face in determining what their final tax liabilities will be. There is litigation on nearly every tax holiday provision, and taxpayers are never sure what the final tax bill is likely to be. There is hardly ever any administrative guidance in the form of circulars or notifications that seek to express a point of view and bring certainty. After all, tax holidays are a decision of the executive to promote a sector or an industry, and why should the same executive not step in either to arrest a misuse or to curb a misinterpretation by the revenue?
The other aspect is that the administration is oblivious to a large extent of the changed ways of doing business. Yes, the revenue has picked up a Vodafone case or has set up overseas tax units to track compliance and facilitate exchange of information. This, however, is aimed at the offenders and does not contribute to the several honest taxpayers. Companies are time and again forced to go through audits that are not just physically cumbersome and endless, but also focused on aspects that do not add to revenue collections. The tax department itself has put forward a proposal that states: “Complexity and innovation in business structures, new financial products, a large number of taxpayers, growth in international trade supported by rapid expansion of e-commerce, commoditization of tax avoidance schemes are some of the factors leading to increased compliance risk for the tax administration.” The message is loud and clear, and the need for a complete rethink on how taxes should be administered and collected is the need of the hour.
In the recent economic crisis (I am making an assumption that it is behind us now), all indirect taxes were reduced, and yet there was no change at all as far as corporate tax was concerned, although policymakers world over focused on reducing tax burdens. In fact, in India, it is generally perceived that tax administrators adopt a more aggressive posture in collection of taxes in times of economic uncertainty. What adds to the complexity is a shifting base for tax holidays—profit linked to investment linked. Taxes should always be collected with reference to a single measure, and any moves to tax spending will be detrimental, as was evident from the huge uproar the initial draft of the direct taxes code had caused with the proposal to levy tax on the assets of a company.
In conclusion, therefore, better compliance cannot be achieved by any single measure. Tax rates ought to be lowered, and a headline rate of 30% is still high. Tax holidays are by and large now very selective, and hence, we should have a lower arbitrage between the statutory and effective tax rates. The focus in my mind should be towards simplifying not the filing but the collection, and that can be done only by bringing more certainty. Litigation has to come down, and for every innovation of one taxpayer the answer is not prolonged agony for all others.
The author is a partner at BMR Advisors PVt. Ltd.
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