New Income Tax Code – issues and insights
Making room for big ideas on taxes
Based on Prime Minister Modi’s observation that the present Income Tax Act needs to be redrafted in consonance with economic needs, the Ministry of Finance has in its brief proposed drafting a new Income tax code, keeping in line international best practices. However, the official communique sets out the task force’s responsibility to submit its report within six months. It is unclear if the mandate is to merely make recommendations on the new code or draft the new code. If it is the latter, it is a tall order to accomplish drafting the code in such a short period, given that drafting requires wider stakeholder consultation. I was comparing the objectives that were set out in 2009, wherein the then government unveiled a draft new Direct Tax Code with the objective to reduce complexity and compliance cost, broaden the tax base by minimising exemptions, check tax evasion and remove ambiguity. The 2009 Direct Taxes Code (DTC) went through several alterations, though it failed to see the light of day with the expiry of the DTC Bill of 2010. The then Standing Committee of Finance made useful recommendations at that time. Given that the present provisions of the Income-tax law have minimalistic exemptions and plethora of general & specific anti-avoidance rules, some of the objectives of the DTC of 2009/2010 have been met. Of course, a lot is desirable from the point of view of reducing complexity and compliance cost for taxpayers.
I would, therefore, imagine that the new code would prominently feature broadening of tax base as one of its main objectives, given the focus on addressing the menace of parallel economy. Though the number of taxpayers has increased significantly in the past decade, our tax-to-GDP ratio continues to be range bound. Hence, I would imagine that a key objective should be to widen the tax base by embarking upon bold initiatives such as taxing agriculture income, and bringing a wider section of untaxed and under taxed non-salaried taxpayers. If our vision 2030 is to be a $10 trillion economy, the new code should address a bold agenda to increase the tax-to-GDP ratio.
Since we are embarking on this exercise, equally important is to rewrite the subordinate legislation by way of rules, administrative guidance and so on. This has been an area of weakness resulting in India being the most tax litigated jurisdiction. The Committee besides looking at international best practices should consider laying down a framework for deeper tax administrative reforms.
The Tax Administration Reform Commission (TARC) has laid down a plethora of recommendations — submitted in 2014, and 2015 in four volumes— implementation of some of which spans over a decade. Most, if not all of them, are relevant in today’s context, despite the efforts made by the new government. Important TARC recommendations, amongst others, include taxpayer’s services and importance of treating taxpayers as customers, governance of direct tax laws including separation of functions of IRS officials between policymaking, assessments, investigations and dispute resolution.
The TARC also dealt with hiring, training and the entire gambit of people function. An important recommendations was on dispute resolution, identifying not just global best practices, but also what would suit India, including strategy for avoiding disputes and settling disputes before they go on trial. Though, the government is pursuing an aggressive digital agenda, there is scope for embracing tax technology for bringing in a shift in data mining, analytics ,taxpayer services, risk management and revenue forecasting exercise.
To sum up, my key expectations from the new tax code would be to focus on:
- Taxpayer segmentation: salaried, business, trust and exempt entities including political parties. The business taxpayers be segmented into small, medium, large and multinational corporations.
- Inducing fresh energy into existing dispute avoidance functions of Advance Ruling, Advance Pricing etc.
- Revamping the dispute resolution system before tax administration, tribunal and high courts, including setting up a National Tax Tribunal or a National Tax Court, the latter in coordination with the Ministry of Law.
- Implementation of administrative measures (some listed above) and strengthening subordinate legislation.