The pandemic may help redefine taxation policies

Countries around the world are dealing with the covid-19 emergency using various tax measures to provide relief to their citizens. In the first phase of managing the pandemic, governments focused on doling out stimulus packages and concessions based on affordability and fiscal capacity.

In India, too, the finance minister announced measures to bring relief to individuals and employers. The notable measures were: i) Deferral of various tax filing and Provident Fund (PF) and Employees’ State Insurance (ESI) return filing due dates; ii) Reduction in the rate of PF contributions; iii) Employer and employee contribution to PF borne by the government for low-income earners; iv) Reduction in rates of tax deducted at source (TDS); v) Accelerated issuance of income tax refunds; vi) Relief in the number of days to be considered in determining tax residency for individuals stranded in the country; vii) Special PF benefits for employers who hire new employees under the Atmanirbhar Bharat Rozgar Yojana. The government also announced the leave travel concession (LTC) cash voucher scheme, helping employees to avail of tax benefit on unused LTC. Such timely, targeted and temporary interventions may well be the type of tax relief one might expect to see more of in the next year. Earlier in the year, the Finance Act 2020 also brought in an optional tax regime of a lower flat rate of tax, sans all deduction for individuals.

The government also looked at structural changes in the labour laws to bolster economic activity and growth. It has moved ahead with the historic change in the labour laws and has brought changes to subsume 29 existing central government labour laws into four new codes. The labour codes seek to revisit established definitions such as that of wages and, among other things, also bring into the ambit of social security newer categories of employees such as gig workers, technology platform workers and the self-employed. The impact of labour codes on businesses, employees/individuals and salary structures could be something to watch out for when the labour codes come into force in 2021.

However, with the continuing economic impact of the pandemic, governments, globally, are looking to mobilize revenues and debating on the best way for immediate collection. Should it be taxes directly collected from individual taxpayers such as increased personal income, wealth and property tax; or increased taxes on luxury goods consumption; or taxes collected via the digital economy. The dilemma for governments of developing countries is that they can’t afford major structural changes to collect new taxes or the increased cost of collection besides garnering the political will to weather possible protests.

Taxation will play a pivotal role in shaping the future macroeconomic stimulus. In the pandemic-ridden world, the need for expanded taxation of income and wealth has been galvanized by expanded fiscal needs.

Tax compliance and tax laws are also being reshaped by enhanced collaboration between tax administrations, globally. Automatic exchange of information for tax purposes is becoming the global standard. Over 100 tax jurisdictions now regularly collaborate with each other, leading to collection of an additional 107 billion euros of revenue through voluntary tax disclosures, offshore tax investigations and other measures. Transparency helps promote fairness in the tax systems and ensures mobilization of revenue for countries, particularly the developing ones. One would expect a major step up in this agenda given its acknowledged success.

Digitally equipped and well-trained tax administrators would help enhance tax collection capacity and improve taxpayer services. That’s why the Indian Taxpayers’ Charter makes a lot of sense. Governments will do well to take the World Bank’s suggestions for innovations in tax compliance program by following the mantra of EFT—Enforcement (making it harder for taxpayers to evade tax obligations), Facilitation (enabling taxpayers to easily fulfil their obligations) and Trust (gain the trust of taxpayers by showing that the tax money will be well spent). This holds true particularly for developing countries like India that have been struggling for years to increase their tax-to-GDP ratio.

Could the current crises and its aftermath present an opportunity to make a major shift towards a fair and equitable system of taxation aided by changed social behaviours? Could the policymakers in India use the pandemic to redefine the fiscal contract between the government and the citizens through smart and balanced taxation policies, leading to sustained and inclusive growth? Let’s wait and watch what 2021 brings!

Sonu Iyer is national leader, people advisory services, EY India