Business World

From GST and DTC implementation to clearing the air on retrospective taxes, the new finance minister has his task cut out

The new government has a challenge of sorts ahead of it — how to manage its fiscal affairs given the low growth momentum on tax collections. With sagging industrial production and low confidence of investors in the high-growth services sector that finds reflection in muted tax collection, the situation is unlikely to improve in the short term. What has worsened matters is the failure to push twin tax policy reform — the direct taxes code (DTC) and the goods and services tax (GST) — on the one hand, arid an overzealous revenue department pursuing tax collection targets arising from high-pitched assessments that are unlikely to stand scrutiny of judicial forums, on the other. In domestic and international business circles, the tremors of retrospective amendments to tax laws are still being felt, and the investment environment is reflective of the phenomenon.

In terms of priorities, the new government should immediately make bold announcements to inspire confidence, as well as implement expert committee recommendations on retrospective laws. He must unveil, among other things, a time-bound plan for implementation of GST and DTC, administrative and judicial reforms for speedy disposal of tax cases locked in litigation and take forward the mandate assigned to the Tax Administration Reforms Commission (TARC) for review of tax administrative practices.

The impending GST rollout announcement should be speeded up. In the process, the finance minister will be expected to give assurances on compensation for losses suffered on account of VAT revenues to bring reluctant states onboard. This is also in alignment with the Bharatiya Janata Party’s election manifesto on decentralisation of the central government’s hold on finances and a bigger role for states.

I don’t anticipate a whole lot of work on DTC implementation given the comprehensive review and recommendations of the parliamentary committee headed by former finance minister Yashwant Sinha. But instead of rushing through its implementation, it would augur well to put out the revised DTC draft as well as the rules supporting the code for public debate. Though, the work on DTC implementation has not been hindered, businesses would appreciate if the proposed changes in tax policy, such as the general anti-avoidance rule, inadequate capitalisation and shift from profit- to investment-based incentives are debated with chambers. As part of the G-20 club, India has been actively participating in the base erosion and profit shifting (BEPS) debate. A well debated DTC, from the foreign investment standpoint, should be a desired objective to win the confidence of foreign investors.

Outside of the legislative agenda, tax reforms and their successful implementation will require a calibrated approach. They should not be viewed as an annual ritual. The annual budget exercise should focus upon fiscal affairs. It should not be used as an opportunity to tinker with direct and indirect tax rates other than the changes necessitated due to compelling circumstances. This will also bring an element of stability and certainty that businesses have been craving for.

OUR ACCOUNTING OF TAX REVENUES IS FAULTY, AND DOESN’T REFLECT THE TRUE POSITION ON COLLECTION

The top item on the agenda should be disposal of cases locked in litigation at various levels. According to independent surveys, 70 per cent of transfer pricing litigation originates in India. As far as tax disputes are concerned, their resolution will necessitate deeper reforms at the administrative as well as judicial levels. Fast-tracking cases is easier said than done. Capacity-building in tax tribunals and setting up of the National Tax Tribunal to replace high courts should be revived with the implementation of the National Tax Tribunal Act, 2005.

It is equally important to reflect upon the reasons behind the present situation. The poor quality of drafting of laws, the failure to issue timely administrative clarifications and interpretations of statements, assessing officers’ performance based merely on targets, making reactive amendments to nullify the impact of decisions rendered by the courts and tendency of the Union of India to litigate matters all the way up to the final court have been major contributors.

Our accounting of tax revenues is faulty, and doesn’t reflect the true position with regard to collection. Besides following the cash basis of accounting, it is important to highlight what tax revenues the government collects from taxpayers who have moved court, since until the dispute is resolved, the taxes represent the government’s contingent liabilities.

Over the years, compliance has increased manifold, leading to an increase in compliance costs, particularly for small and medium (business) taxpayers. We need greater investment in IT architecture to monitor tax compliance, implement a risk-based system of checks to deal with errant taxpayers and tax frauds.

While large taxpayers should be ranked based on the quality of cooperation and compliance and a relationship of trust should be built with them, small taxpayers should be freed from the onerous compliance burden. This can be achieved with a sustained programme for the implementation of taxpayer services and segmentation of taxpayers.

Finally, the new government should give the TARC report a serious look. And, rather than merely reviewing its findings and recommendations, it should get down to the task of implementation.

Views are personal