Prioritising a stable and simple tax regime in Budget 2024 to enhance ease of doing business

Businesses are now calling for stable and simplified tax laws to enhance the ease of doing business.

By Gokul Chaudhri 

In the World Bank’s Doing Business Report 2020, India's ranking improved significantly, jumping 79 spots from 2014 to reach 63rd out of 190 countries. This progress underscores India's commitment to regulatory reforms, faster approvals, streamlined imports/exports, and reduced compliance burdens, all aimed at fostering transparency and accountability in business operations.

Recent tax policies, including corporate tax rationalisation and Goods and Services Tax (GST), have driven significant tax buoyancy, resulting in record-high revenues. Businesses are now calling for stable and simplified tax laws to enhance the ease of doing business and support India’s growth trajectory. Approximately 67 percent of industry leaders, according to a Deloitte Survey, anticipate this to be a key focus in the upcoming budget. A stable and pragmatic tax policy is crucial for sustainable business expansion and increased foreign investments, reducing uncertainty caused by frequent policy changes and disputes.

Simplified tax structure: Navigating India’s tax structure has long been a formidable task for businesses, impacting their operational efficiency and overall ease of doing business. There is a pressing need to shift the tax paradigm from focusing on rates to prioritising revenue generation. This transformation can be achieved through moderate tax rates and an expanded tax base, aligning with the vision of 'Developed India' by 2047. Simplifying the tax structure could entail implementing a unified rate for businesses, while individuals can benefit from a straight forward 2 to 3 tier-rate structure featuring low or moderate rates, eliminating surcharges, cesses and maximising deductions.

With the rising inflation, the current standard deduction limit of INR 50,000 is insufficient to cover the escalating costs and expenses associated with higher standard of living. There is a strong expectation for a higher linked standard deduction. Additionally, suspending tax compliance requirements during maternity or other significant life events would significantly reduce the compliance burden for individuals, particularly women.

There is also a necessity to reform the capital gains tax framework by simplifying rules concerning asset holding periods, varying tax rates, and indexation benefits.

India also has an extensive and daunting withholding tax regime - Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) - on domestic transactions. This TDS/ TCS regime raises the compliance cost and resource burden on businesses in India. There are challenges for vendors/ buyers in availing withholding tax credits. The use of technology to substantially increase information collection and use by the government for monitoring and compliance should also be an opportunity for reducing the compliance burden on taxpayers. The existing GST database can be leveraged by the Government to restrict the scope of transactions subject to TDS/ TCS to only those transactions that are not captured under GST.

Besides reducing the scope of transactions on which TDS/TCS is imposed, there is also scope to standardize the TDS/TCS rates and thresholds for the transactions that will still remain subject to TDS/ TCS.

Reducing unwarranted litigation: Even though India ranked overall at 63 in the World Bank’s Report on Doing Business, it still ranks below 100 on 3 of the 11 indicators used to compute the overall rank of countries. These are enforcing contracts (163), registering property (154), and paying taxes (115). Enforcing contracts and paying taxes are areas where a weak dispute resolution procedure weighs heavily on the business environment in India.

Tax disputes in India have risen significantly over the past few years. Many disputes are overturned on appeal, highlighting the need to eliminate unnecessary aggressive assessments. Despite measures like the Vivad Se Vishwas Scheme (VsV), increasing monetary thresholds for filing appeals, high litigation rates continue to plague the business environment. Addressing this requires robust mechanisms to resolve both current and future tax disputes swiftly and efficiently.

* Only taxpayer to appeal before tribunal: Restricting appeals before tax tribunals to only taxpayers, as seen in other countries like the US and UK, would enhance efficiency and reduce bureaucratic hurdles.

* Using GenAI: Technological advancements, such as generative AI (GenAI) and the deployment of legal bots, present an opportunity to revolutionise tax administration processes. These tools can be extensively trained on legal precedents. Taxpayers' submissions could be digitally analysed by these machines, enabling the tax administration to receive a proposed order based on a thorough analysis of both legal principles and factual data. This approach not only facilitates timely case resolution but also enhances the quality of decisions made. Another potential application could be reimagining the VsV to offer customised settlement terms to taxpayers based on assessments made by GenAI regarding the gravity of the case. Unlike the previous VsV, which primarily relied on whether an appeal was filed by the taxpayer or tax department, this updated approach could offer favorable terms when GenAI identifies a strong taxpayer case, and vice versa.

* Strengthening alternate dispute resolution: Reintroducing faceless tax settlements, while leveraging technology tools would promote faster dispute resolutions and also address concerns related to discretionary practices historically associated with tax settlements. Additionally, avenues like mediation and arbitration should be explored which is an established practice in countries such as the UK and US.

* Enhancing APA procedures: Refining APAs to ensure tax certainty and reduce compliance costs involves procedural improvements such as e-filing, expedited processes, and streamlined post-APA compliance.

Transition to digitisation: The Government has been proactive in developing both physical and digital infrastructure recently, with plans to sustain this momentum. Industry leaders strongly advocate for advancing digitisation through an online single-window system to streamline administrative procedures, reduce paperwork, and expedite necessary approvals. Cybersecurity and regulatory compliance remain critical concerns, highlighting the need to address security risks and ensure regulatory adherence in digital initiatives across industries.

Advancing research and development (R&D) initiatives is crucial for driving economic growth, technological advancement, and global competitiveness. Evaluating India's current R&D funding landscape and its outcomes is essential to maximise its impact. The government is anticipated to focus on investment reforms to attract capital for manufacturing and R&D, aiming to boost production scale and competitiveness. Promoting R&D within domestic companies and fostering global R&D services in India to cultivate a skilled talent pool will accelerate innovation, particularly in advancing semiconductor technology.

The upcoming Union Budget for fiscal year 2024-25, themed 'Viksit Bharat', aims to outline India’s path to becoming a developed nation by 2047. Ensuring policy consistency and implementing crucial reforms to improve the business environment are critical to achieving this goal. Emphasising a stable and simplified tax regime, along with effective dispute resolution mechanisms, move towards digitisation and advancement of R&D initiatives will enhance India’s global competitiveness in terms of ease of doing business and enable efficient resource allocation for sustained economic growth.

Gokul Chaudhri is President, Tax, Deloitte India.

Views are personal and do not represent the stand of this publication.