Despite the persistent COVID scenario, India’s direct tax collections for FY 21-22 have soared high with a 60 per cent increase over last year . While in the recent years, India has witnessed significant tax reforms such as corporate tax cuts, parity in dividend taxation regime, dispute resolution scheme, etc., the following tax reforms are the need of the hour and therefore need government’s attention:
Reform 1: Focused dispute resolution and clarity on prevalent tax issues
The Government should consider minimisation of future tax and curtailing time limits for settlement therein. The investors still strive for clarity on legacy issues like protracted tax litigation, uncertainty around some tax laws – with authorities like Authority for Advance Ruling (now Board for Advance Ruling), Advance Pricing Agreement, Dispute Resolution Panel not meeting the stipulated objective. The introduction of faceless mechanisms and teething troubles associated with it hasn’t helped either. Hence, while minimizing the existing stock of litigation, steps must be taken to prevent and reduce future litigation.
Further, the investors are currently grappling with various international tax issues like Equalization levy, Significant Economic Presence, nexus-based taxation – proposed OECD two pillar approach/new profit attribution framework proposed by CBDT, Multi-lateral Instrument under BEPS Action Plan, etc. Therefore, clarity should be provided through proper guidelines and comprehensive FAQs should be released by the Government.
Reform 2: Rationalizing taxation rates and incentives
While corporate tax rates have been fairly streamlined with global averages, the expectations on the personal tax rates front have largely not been met. Therefore, the Government should consider uniform cuts over personal taxes as this could have a rapid impact on the disposal income, encouraging consumer spending which could boost the economy.
Though, the government’s focus is to move away from investment linked incentives to a simplified regime, certain expense linked deductions may be implemented particularly where the economic growth has been moderate.
Also, now with global attention being largely drawn towards promoting environment friendly and green initiatives, these could be integrated to consumer spending behavior through tax concessions etc. encouraging them to adopt greener initiatives (for instance, tax deduction for installation of solar panels for captive consumption etc.).
In addition to above, government should provide relief for covid affected patients either introducing tax holiday or standard tax deductions.
Reform 3: Implementing SOPs for tax refund processes
With the current procedures adopted by the authorities, the tax refunds of taxpayers are significantly delayed causing staggered cash flows. Therefore, government should lay down proper SOPs defining timelines for clearances of refunds of prepaid taxes in pursuance of any tax proceedings such as rectification requests, appeal effects, etc.
Reform 4: Introduction of Covid tax regime
With Covid playing a significant role over the past couple of years and impacting almost every sector of the economy, the government should lay a conscious focus for neutralizing the effects. This could be through providing specific deductions or tax holiday benefits to industries severely impacted, such as tourism, hospitality, real estate, etc.
Reform 5: Introduction of tax regime for cryptocurrencies
With Cryptocurrencies witnessing exponential growth recently in the Indian market, government should bring in specific rules in the taxation laws for bringing in clarity about taxability as well as for monitoring these transactions through appropriate reporting through SFT statements, etc. This is also important to regulate the cryptocurrency market in a fair and transparent manner.
Reform 6: Moving towards an Aatmanirbhar Bharat
While Government has been working towards simplification of tax laws with effective phasing out of all exemptions under the Income-tax Act 1961, but tax benefits may be required for boosting Aatmanirbhar Bharat or ‘self-reliant India’ for selected crucial sectors like healthcare, aerospace & defence, etc. Reduction in base tax rates for corporates (specifically for newly established companies) to place India at par with Asian rivals like China, Indonesia, etc. is definitely a step in the right direction; certain sector specific tax incentives (weighted deduction for R&D expenditure) could do further good to promote the ‘Make in India for the World’ initiative.
Overall, the Finance Minister will be in a much better position vis-a-vis this time last year and therefore one could expect some bold measures to spur growth.