NEW DELHI :
A government panel tasked with overhauling the nearly six-decade-old Income-Tax Act on Monday recommended significant relief for taxpayers, including an across-the-board 25% tax rate for both local and foreign companies and changes in personal tax slabs to benefit middle and upper middle class Indians.
The draft code also proposes incentives to startups and a new concept of settling disputes through mediation between the taxpayer and a collegium of officers, said a person familiar with the contents of the report submitted to finance minister Nirmala Sitharaman on Monday. The government will release the report of the panel, led by Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan, in the public domain for consultations after examining the recommendations, a second person said on condition of anonymity.
The proposed corporate tax reduction will apply to both large local as well as foreign companies that are present in India without a subsidiary and are taxed at 40%. Unlike domestic firms, foreign companies pay a higher corporate tax rate, but do not have to pay dividend distribution tax that is applicable to domestic companies. At present, domestic companies with sales of as much as ₹400 crore pay a lower 25% rate and bigger companies, which account for the lion’s share of the government’s tax revenue, pay 30%, excluding the surcharge and cess on the income-tax outgo. If implemented, the tax rate reduction could prove to be a big fiscal stimulus for the corporate sector reeling under a sharp economic downturn. While the new direct tax law will bring to force new taxation concepts as well as schemes to reduce litigation, the actual tax rate reduction may be executed as part of annual Finance Bills, depending on the revenue buoyancy of the government from time to time.
The code has a surprise for foreign companies. The draft proposes a “branch profit tax" for such entities on the earnings that they repatriate to their overseas parent. It remains to be seen what would be the net effect of the branch profit tax and the reduced corporate tax rate for them. The Tax Cuts and Jobs Act rolled out by the US government in 2017 encourages overseas arms of American companies to repatriate their profits to their parent companies.
The first person cited earlier said a major restructuring of the personal income-tax too has been proposed to benefit the middle class and upper middle class.
The task force also recommended that assessment proceedings be made faceless, and an option be allowed to the public to seek clarifications on tax matters from CBDT.
Rakesh Nangia, managing partner of advisory firm Nangia Advisors, said India companies are waiting to see bold reforms. “On income-tax litigation reforms, it is likely that amnesty schemes akin to Sabka Vishwas (legacy dispute resolution) Scheme that was introduced to curb pending litigations under the erstwhile indirect tax enactments could be announced on the direct tax front as well."
The proposals in the draft code are aimed at bringing more certainty to taxation of personal and corporate income and capital gains, and at bringing the gist of numerous judicial pronouncements made since 1961, when the current tax law came into force, in one place for easy reference. It could improve ease of doing business and reduce the compliance burden as well as tax disputes. “The 1961 Income- Tax Act, besides being a code drafted in an era when India was a closely controlled economy with quasi-socialist mindset, has outlived its importance," said Mukesh Butani, founder and managing partner at BMR Legal.
India has been following the philosophy of phasing out tax incentives, which complicate the law and lead to litigation, and of simultaneously reducing the tax rate so that businesses get the benefit of low tax incidence upfront. The current economic slowdown has forced the government to take a relook at this and offer investment-linked deductions to fresh investments in sunrise industries such as semiconductors in the Finance Bill 2019 presented in Parliament by Sitharaman in July.