June 25, 2019 6:54:03 pm
By Promod Batra
To meet the needs of the fast-changing global landscape and regulatory developments, various measures have been taken on the direct tax front in the recent past. For instance, the introduction of tax accounting standards, Advance Pricing agreements, Place of Effective Management guidelines, General Anti-Avoidance Rules, taxation of digital economy, etc. The tax code in its current form poses challenges in terms of not only being voluminous, but complex as well, leading to arguably the biggest challenge – interpretation and associated litigation.
The government has in the past made attempts to simplify and rationalise direct tax laws in the country. The first in that direction was the release of the draft Direct Tax Code (DTC) 2009, which was subsequently changed to DTC 2010 and DTC 2013. However, the same was not implemented. More recently, the government constituted a Task Force for drafting a new direct tax legislation on 22 November 2017, incorporating international best practices while keeping in mind the needs and nuances of the country.
Needless to say, the key expectation is that not only equity, but simplicity, certainty and stability should be embedded in the law. It should be simple to understand, provide certainty and be free from ambiguity around its application as well as implementation. Such stability is essential with growing globalisation and increasing foreign investments into India. At the same time, the right incentives need to be granted to the right taxpayer.
In line with the above, some of the focus areas for new direct tax legislation could be –
– High rates are a recipe for low tax compliance. A lower rate for lower incomes and high rates for higher incomes will ensure better balance. The threshold for income tax levy needs to be revised periodically to counter the effects of inflation. It needs to be realised that tax rates should be moderate, to incentivise and to promote a robust, growth-oriented investment climate.
– Careful consideration must be given to merit, in today’s date, in continuance of MAT. With the phasing out of various tax incentives, the difference in taxable profits and book profits is reducing. Also, the progressive reduction of corporate tax rates and increase in MAT rate over the years has bridged the gap between the two rates considerably.
– 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. Hence, abolition of DDT and taxation of dividends at the shareholders’ end will be a much simpler system. It is also likely to take a huge compliance burden off the companies and provide some respite.
– Over lakhs of cases are pending before appellate authorities. It is foreseen that if laws are made simple, litigation may be reduced. Further, processes in assessment of tax, and for appeals thereafter, should be simplified. Setting a time limit for assessments, appeals and hearings / passing of orders may be specified and enforced in the new DTC. Hence, there should be implementation of administrative measures and strengthening of subordinate legislation.
The opportunity to rewrite a code gives headroom to look at various aspects from scratch, whether the removal of unwanted provisions which have been introduced over the past almost 60 years, or lowering of income tax rates, without reducing effective tax rates by rationalising deductions and exemptions. However, as Leo Tolstoy wrote in War and Peace: ”Writing laws is easy, but governing is difficult.”
The revamped direct tax legislation needs to be well supported by an able and effective administration and a fast-track mechanism for dispute resolution. While building the trust of the taxpayer has always been talked about, it is equally important for the tax collector to repose trust in the taxpayer and provide him with greater powers to amicably resolve disputes.
If simplification is to be achieved, a relook is needed of the overall architecture of the current legislation. The new legislation cannot be a similar enactment. It is for this reason that earlier attempts at a new DTC did not see the light of day. In fact, critics are already sceptical about the revived attempt.
Nevertheless, the time for piecemeal amendments is behind us and surely what is needed today is a more holistic reform in the shape of a direct tax legislation that motivates honest taxpayers, reduces compliance costs and lowers administrative burden. It would be interesting to see how the Task Force, set up for the purpose, aims to achieve it, as it submits its report in the coming months.
The author is Partner, Deloitte Haskins and Sells LLP.
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