New govt needs to expedite tax reforms, boost receipts

The union government’s tax collections may have shown relatively higher buoyancy in recent years, but the growth in tax receipts has still been sub-optimal in the last decade. The tax-GDP ratio would need to rise by several notches for the exchequer to be resource-rich.

There is a need to widen the tax base further, make tax less pinching for the middle class, reduce the reliance on indirect taxes that are regressive, and guard against the relapse into protectionism, in the form of creeping rise in average Customs duties. The Goods and Services Tax (GST) needs to be simplified, by a slabs recast that doesn’t result in further rise in tax rates, and the rules for allocation of Integrated GST proceeds among states ought to be made transparent.

“The new government should provide clear interpretations on current GST issues and implement an amnesty scheme to encourage compliance and minimise disputes,” said Saurabh Agarwal, tax partner, EY India. “It should also address sectors with an inverted duty structure by aligning GST rates,” he said.

To be sure, as many as 14,227 appeals against disputed tax demands raised by Central GST authorities were pending resolution as of June 2023. The number stands higher for income tax and Customs. In the Income Tax department, the number of appeals pending at Commissioner (appeals) level goes as high as 544,205; and in Customs, an estimated 30,000 cases are pending in various courts, involving an amount of more than `40,000 crore.

Perhaps, the introduction of technology, such as Artificial Intelligence (AI) and Machine Learning (ML) in resolving disputes can also expedite the process, suggest some experts. Earlier in an interaction with FE, Gokul Chaudhri, president-tax, Deloitte India had said that the government can use technology for resolving disputes and streamline the process of determining whether to litigate an appeal or not. “AI can be used to give a ‘predictable outcome’ to any dispute based on past orders,” he had said.

Meanwhile, inverted duty structure is a situation where inputs and raw materials attract higher tax than the finished products. In GST, inverted duty structure creates hurdles for manufacturers to claim credit for taxes paid on inputs, and in cross-border trade it makes imports of finished products cheaper than raw material and disincentives local manufacturing.
Earlier this month, FE had reported that the government has identified a clutch of products where inverted duty structure is distorting trade and impacting manufacturing competitiveness and has initiated the process to address the issue, citing a senior official.

Darshan Bora, partner at Economic Laws Practice (ELP), said: “On the GST revenue front, instead of looking at total monthly collections, a detailed analysis and trend comparison with pre-GST period reveals revenue shortfall.” Indeed, in the five years prior to FY18 (the GST introduction year), the buoyancy of indirect tax was 1.5, whereas in FY18-FY23, the buoyancy dropped starkly to mere 0.6.

The finance minister, however, had said earlier this month that despite the GST rate being less than the prescribed RNR and Covid-19 affecting the revenues, GST collections (as a percentage of GDP) have now reached the levels they were before GST (both net and gross).
She had also mentioned that due to GST, states now have more revenue as they had earlier with the erstwhile VAT. “Without GST, states’ revenue from subsumed taxes from FY19 to 2023-24 would have been `37.5 trillion. With GST, states’ actual revenue amounted to `46.56 trillion.”

The Congress party, in its manifesto, has said that it will replace the existing GST laws with GST 2.0, which will be based on the universally accepted principle that GST shall be a single, moderate rate (with a few exceptions) that will not burden the poor. They have also mentioned re-designing the GST Council and making it the final authority on policy matters, and exempting agricultural inputs from the tax regime.

Bora said that there are various administrative and legal issues relating to GST which the new government should address to promote a business friendly environment. “For example, there is a need to clamp down on aggressive investigations against bonafide tax-payers and pressure to deposit tax pending adjudication of interpretation issues.”
On the direct taxes front, the government has already begun discussions regarding implementing the Direct Tax Code (DTC), which aims to make major changes in the current income tax structure. FE had reported in April that the Narendra Modi government, if voted back to power, will implement the long-delayed DTC on a priority basis, citing official sources.

The move is aimed at further simplifying the laws governing direct taxes and aligning these more with the global norms, the sources said. A recast of the capital gains tax regime, and removing several irritants in the implementation of the tax deducted at source (TDS), are among the key proposals being discussed.

Interestingly, the Congress party in its manifesto has also mentioned enacting a DTC that will usher in an era of “transparency, equity, clarity and impartial tax administration of direct taxes”.

Experts are of the view that the DTC should simplify the capital gains tax regime to align the tax rates and holding period across asset classes. Currently, the long-term capital gains tax (LTCG) is more benign on listed shares, while other types of assets, including real estate, attract the tax at higher rates, so the taxpayers have to hold these for longer periods to escape the higher short-term taxes.

Mihir Gandhi, partner, tax and regulatory services, BDO India, said that over the years, the capital gains taxation regime in India has become complicated with various buckets, periods, different tax rates and indexation benefits.

For the full Budget 2024, some experts suggest expanding the eligibility criteria for availing tax holidays available to startups. The current eligibility criteria leave out a significant portion of promising ventures. “Budget 2024 can address this by expanding eligibility criteria to include DPIIT registered startups, and streamlining compliance processes. This would attract more investment, talent, and innovation,” said Kunal Savani, Partner, Cyril Amarchand Mangaldas.

Some also suggest extension of the sunset date for availing the 15% corporate tax benefit by companies for setting up new manufacturing units by two-three years. The government had introduced the concessional corporate tax rate in 2019, and had extended it by one year in the FY24 Budget. Firms that had commenced operations of the newly setup plant by March 31, 2024 can avail the benefit.

But since the pandemic related disruptions and global slowdown hindered many potential investors from setting up new plants and making full use of the tax incentive, industry leaders have urged the government to grant an extension to the sunset date.

Traditionally, corporate tax collections have formed a larger share of the Centre’s direct tax revenue, but since FY21, its collections have fallen as compared to personal income tax (PIT). In FY21-FY25 (Budget estimate), corporate tax collections, as a percentage of GDP, averaged 2.9%, while PIT averaged 3.1%. Whereas, between FY16-FY20, corporate tax collections had averaged 3.2%, as a ratio of GDP, and PIT had averaged 2.4%.

“The rise in PIT collections as compared to corporate tax collections are largely a result of cut in the corporate tax rate to 22% (in 2019), introduction of GST, which led to higher compliance in income tax; use of technology for detecting taxpayers’ activities and curbing evasion; introduction of long-term capital gains tax (2018), and taxing dividends by investors, which wasn’t the case before 2020,” explained Sudhir Kapadia, partner, EY India. Kapadia feels the trend to continue in the coming years, only because more income taxpayers are coming into the tax net.

The Congress party says that if they come to power, they will maintain “stable personal income tax rates” throughout their term to ensure that the salaried class is not subjected to rising tax rates and have clarity to plan their finances over the medium-to-long term.

Source:-  Financial Express