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A taxpayer-friendly interface for India Inc: Is it tough proposition?

Bring in technology to cut interfacing between tax assessment officer (AO) and taxpayer.

ET CONTRIBUTORS|
Last Updated: Jan 17, 2020, 09.12 PM IST
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When it comes to taxation, there is always a reassurance on the intent of making India taxpayer-friendly. From the first statement made by the previous Finance Minister and last month’s statement of the current Finance Minister – reassurances have kept on coming in on a regular basis.

Why do we need such continuous reassurances? One thing we have liked about this government is its strong commitment to articulate its intent, and even stronger commitment to deliver on that intent.

But why is this tax conundrum unique to India (a Google search on ‘tax harassment’ reveals articles only for India, and no other country) and not yet resolved. I guess the problem lies in the action following the intent:

Step 1: Bring in technology to cut interfacing between tax assessment officer (AO) and taxpayer.

Step 2: Ensure disciplinary action and firing, suspension and forcing early retirement of revenue department officials, wherever there is a question on probity.

Step 3: Bring down corporate tax rates to a level that makes India super-competitive.

In my last two decades of dealings with the tax department, I have come across only 10 per cent people with questions on probity. Frankly, tax is such a complex matter that any second or third follow-up with technology interface ends with an AO. Also, just as punishing murderers do not stop people from committing this heinous crime, Step 2 will have limited efficacy levels.

While tax rates are low in India, companies cannot escape the hidden costs related to tax compliance and administration. These hidden costs manifest in form of capital blocked with the tax department, wait for refunds and unnecessary litigation costs, among others.

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The table above indicates how tax refunds have kept on increasing to 15% of the tax amount, and the government is doing everything to make such payouts. But why does this amount get blocked in the first place?

The problem warrants a serious re-look at current incentives for the Finance Department and at AO-level tax collections. For the government, tax revenues are critical. While tax refunds are not seen as a liability, the government is over-motivated to show higher collection even if they have to refund next year. For AOs, more the tax demand raised, the better it is for career progression. Therefore, the whole system is incentivised to raise more taxes, even if these need to be refunded or spent on cases or litigations.

Look at the process of taxes paid: 10% TDS for all receipts, four advance taxes and an assessment tax at fiscal year-end. For corporates, assuming a tax rate of 22% to have no refunds at current TDS rate, PBT margins would have to be 40–45 per cent, which is a unlikely scenario.

To start off, I feel the government should chalk out a 3-5 year roadmap, wherein it could look at bringing down TDS rates to perhaps 2-4 per cent, doing away with the arbitrary business of giving TDS exemptions and reducing advance tax exercises to only one in March. This would release a chunk of capital without impacting tax collections.

For the AO, career progression should be on tax raised, where there is no litigation. Therefore, there is limited desire to bring up unreasonable demands on litigious sections (Section 14A, Section 56), transfer pricing, arbitrary classification of capital gains as business income or interpretation of expenses (to be allowed for business).

Any discussion with tax professionals, and the data shows 80% of all demands and disputes are on tax payees, who have filed returns!!

The current IT code has several sections which allow such interpretations (or rather, misinterpretations). While a simplified Direct Tax Code has been on the agenda, the previous exercise, which was well drafted, was not adopted by the previous Finance Minister. An exercise with another DTC committee is in process, and one sincerely hopes that simple rules are put in place that deter roving enquires by the IT department (as seen for private investments in startups).

Moreover, what will help is removal of the undue arbitrage between two parties where the government has to pay 6% and the taxpayer has to pay higher. The government has recently reduced the public provident fund spread to 1%, and a similar step can be taken to bring in some parity if there is a dispute or litigation.

All above recommendations will not impact overall tax collections – which is critical, given India’s large social and developmental agenda. We are reaching a stage wherein if a taxpayer-friendly interface of the highest standards is not put in place, investments – the very instrument for growth – would suffer.

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Bangladesh and Vietnam, post 2016, have seen the beneficiaries of MNCs wanting to diversify their supply chain from China in wake of the US-China trade war. For India to benefit, immediate repair to our tax regime image is very crucial. We can see the impact the three countries have had on per capita income last few years.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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