The message is loud and clear. India needs a paradigm shift in direct taxation. Will the government bite the bullet like it did for GST?
Nineteen years into the 21st century and we are still following a tax law that is half a century old. A law that is now largely considered inadequate to cater to the demand of the 21st century India. So, within a week into its second term, the government put the direct tax reforms firmly on top of its agenda, at the heart of which lies a new Direct Tax Code (DTC).
A new DTC has been in the works for almost a decade now, with law makers across the political spectrum recognising the indispensable need for it. In fact, some of the provisions from the earlier avatar of the DTC (e.g. GAAR, POEM and the like) even made their way into the existing law by way of certain amendments. However, the time for piecemeal amendments is behind us and today’s need is more for a holistic reform in the shape of a new code.
Over the past few years, we have seen certain directional changes which are perhaps pre-cursors to the kind of reforms that we can expect in the DTC. Two clear cases in point are (a) the progressive reduction of the corporate tax rates and (b) the gradual phaseout of tax holidays/weighted deductions. The challenge here was that they were being carried out in a phased manner, and the latter outpaced the former, causing hardships to the section of taxpayers concerned.
The DTC needs to rejig the prevailing tax rate structure so as to make it a lot simpler. The base tax rate depends on the turnover of the company. For instance, for companies with turnover below Rs 250 crore in FY18, the base tax rate is 25 per cent as per the Finance Act, 2019, enacted in February 2019. While the intent here is to benefit smaller companies, in effect, it results in an inequity in the tax structure, which penalises high turnover companies for their size and performance. There is an urgent need for stronger inclusivity by reducing the rate to 25 per cent across the board for all categories of companies.
Minimum Alternate Tax (MAT) rate of 18.5 per cent (on book profits of a company) is another area which requires close scrutiny if our corporate tax structure has to be simplified. With the gradual phasing out of tax incentives, the difference in taxable profits and book profits is going to shrink. Furthermore, the progressive reduction of corporate tax rates and increase in MAT rate over the years has bridged the gap between the two rates considerably. Given this backdrop, a careful consideration must be given to the merit in the continuance of MAT in the new DTC.
Dividend Distribution Tax (DDT) is payable by companies on dividends distributed to shareholders from profits which have already been subjected to tax, adding yet another layer of tax obligation imposed on companies. In case of cross border payments, certain jurisdictions do not permit credit to the foreign shareholder in respect of this DDT as it is not a tax directly borne by them. Thus, abolition of DDT and taxation of dividends at the shareholders’ end will be a much simpler system and it is likely to take a huge compliance burden off the companies.
One of the biggest concerns of the current Indian tax regime has been litigation. The Direct Tax Code needs to take a good hard look at the causes of this litigation and find commensurate solutions. In the past, the Indian Revenue Authorities (IRA) have withdrawn cases from various appellate forums in view of the increased monetary limits for filing appeals. There have also been instances where the IRA has accepted decisions of lower courts on certain issues, sparing the taxpayers the hardships of a long drawn litigation.
However, we still find ourselves staring at backlogs of tax cases in courts across India. Clearly, the issue is not just about a certain monetary threshold or dispute on certain tax issues. It is systemic and runs a lot deeper. The DTC needs to put in place a framework that makes the process of appeal filing by the IRA far more rigorous and accountable than what it is today. An appeal cannot be mechanically filed just because the IRA lost and the tax effect breaches a certain threshold. It should be based on a critical evaluation of the issues involved and the reasons provided by the appellate authority for ruling against the IRA. DTC must institutionalise a process to this effect.
There are a number of cases where the main cause of litigation is a conflicting, but bona fide interpretation of the legal provisions. For such cases, a possible resolution could be to have appropriate guidance which adequately clarifies the intent of the legislature. This would, of course, be in addition to ensuring that the provisions are simple and unambiguous. These measures should provide sufficient clarity on the intent of the law and prevent incremental litigation.
Finally, there is need to ramp up the age-old assessment process and the concept of anonymous e-assessments provides a great opportunity to the government to introduce such a change. Here, the assessments will be largely faceless as they will be carried out by back-end teams with sufficient sector knowledge, in addition to their tax expertise. This should go a long way in ensuring a better appreciation of sector-specific issues and their corresponding tax implications.
However, if this novel idea has to work, it needs a lot of legislative muscle. At present, there seems to be a gap between the vision of anonymous e-assessments and the current set of laws. This gap needs to be bridged by enacting new assessment laws and issuing detailed guidelines for execution. Simultaneously, the government must spruce up its IT infrastructure to make sure that there are no technological challenges in on-ground implementation of this idea.
This government, in its preceding term, showed tremendous resolve by introducing GST and changed the indirect tax landscape in this country for good. There cannot be a more opportune time than the present to replicate a similar transformative shift in our direct tax structure.
Indeed, it is reminder of the famous proverb - Now or Never.Naveen Aggarwal is Partner and COO-Tax, KPMG India. Views expressed are personal.