BUDGET COUNTDOWN. Think beyond

The Indian tax system is going through a transformational phase. While on the one hand, provisions are being introduced to simplify procedural aspects, the Government, on the other side, is introducing/operationalising new regulations such as general anti-avoidance rules, residency rules based on place of effective management, etc., with the intention of augmenting tax revenues.

On the international front, the Government has successfully re-negotiated tax treaties with various countries to plug capital gains tax exemptions. India has also shown swiftness in adopting new tax measures promulgated/recommended under the Base Erosion and Profit shifting project of OECD and G20 countries.

These regulations are targeted towards increasing the fair share of state revenue and strengthening of rules to prevent harmful tax practices. However, there is also an underlying apprehension that these would proliferate tax litigations impacting businesses. It will also aggravate the back log of already over-burdened judicial system. Further, with the application of Ind-AS as new accounting standards and tax’s own Income computation and disclosure standards, there is likely to be more confusion.

Hence, there is an urgent need to re-look at the tax policies with an aim to balance taxpayer’s expectations and Government’s financial requirement.

While presenting the last budget, the Finance minister hinted at reduction in corporate tax rates to 25 per cent and at the same time introduced provisions to withdraw tax incentives and exemptions over a period. Such a move is likely to offset the benefit of the reduced tax rate. The Government should independently evaluate an ideal corporate tax rate considering the prevailing economic and other factors rather than trying to look only at the requirement of the exchequer.

The economy encompasses a wide range of businesses. If tax laws do not keep up pace with the dynamic business environment, a lot of resources would be directed towards unproductive efforts. The policymakers should therefore re-orient tax policies to suit the diverse and rapidly changing business scenarios.

Also, continuous efforts should be made to frame the provisions unambiguously to the extent possible to avoid any room for creating divergent views by tax administrator and the taxpayers.

The Government has created a technology platform for tax compliance process. But the existing tools don’t appear to help in qualitative review of tax returns and other information. Revenue authorities today are losing most of the tax disputes at the apex court. Sophisticated analytical tools would help not only in identifying unusual transactions requiring detailed review but also provide a deeper understanding of the issue involved with good statistical data points including year on year comparative analysis. The Government should promote such tools.

For a developing economy such as India, fair tax policies with minimum disputes would help achieve its aspirational growth ranks. It would also be a step towards the Government’s promise of minimum government and maximum governance in tax administration.

Srinivasan is partner and Surana is director at Deloitte Haskins & Sells

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