Taxation has been a weak area for the Central Government. Statutory compliances have reached a saturation level and some relaxation is needed in 2020
The year 2019 started with all political parties in election mode due to the general elections and has ended with large-scale protests due to the Citizenship Amendment Act, 2019 (CAA) and the National Register of Citizens (NRC). The economy and taxation usually take a back seat when the country has such a volatile environment and this is exactly what happened in India. By and large, 2019 was not good on the economic front and the fiscal situation was in such a state of turmoil that it forced the Finance Minister to review the situation every week and come up with stimulus packages.
Taxation has been a weak area for the Narendra Modi-led Government. Statutory compliances have reached a saturation level and some relaxation is needed. Till now the Government has paid heed more to the bureaucracy than the professional fraternity on this front. As we enter a new year with a pall of economic gloom hanging over it, full-fledged economic and taxation reforms are the need of the new decade. Here are some reforms the Government could consider in the days ahead.
Direct tax reforms: India faced weak demand in 2019 that led us to the economic slowdown. The Central Government reduced corporate tax rates up to 10 per cent, the biggest cut in the last three decades. As per estimates, this cost the exchequer around Rs 145,000 crore. The Government reduced corporate tax in anticipation that after the cut businesses would have a better cash flow and they would invest it further, resulting in employment generation and creation of demand. The results of this cut are expected in 2020. If the excess investments meet the Government’s expectation then they would ease the pressure of rising unemployment. But, if this calculated move backfires then it would be a setback to the Government because it promised a lower corporate tax rate. If even after sacrificing revenue the Government is unable to recover money, then it would work on reducing other deductions and so on.
Cut in individual income tax rates: The economic deceleration was due to weak demand. The Government slashed corporate tax and increased supply — which was already abundant — whereas the requirement was for increasing demand. Therefore, to create demand the Government could reduce income tax rates and create some more sub-slabs. For instance, the current tax rate is 20 per cent for the Rs 5 lakh to Rs 10 lakh slab. This could be reduced to 10 per cent and a new slab of Rs 10 lakh to Rs 20 lakh could be created with a 20 per cent tax rate.
Direct tax code: The current Income Tax Act was introduced in 1961 and since then the business environment has changed. It needs a total revamp so that a Direct Tax Code (DTC) is required. The UPA Government had proposed a DTC but due to differences between P Chidambaram and Pranab Mukherjee, it never saw the light of day. In August the Akhilesh Ranjan task force submitted its report along with a new draft for the DTC and recommended its implementation.
Tax profits by multinationals operating in the digital space: India has raised apprehensions at global forums, particularly at the Organisation for Economic Co-operation and Development (OECD), about profit-sharing by multinationals operating in the digital space. Currently, the entity is taxed in the country where it has a physical presence. “Base Erosion Profit Shifting” Project (BEPS) will be addressing the core issue of such taxation. In the digital world, there is no nexus between physical presence and revenue generation. While traditional taxation statutes take into account things like assets and employees located in the country, in the digital world these have become irrelevant to some extent. So perhaps this principle should be modified to a large extent. The introduction of “equalisation levy” was the first baby step towards such taxation and thus much more comprehensive tax may be levied on this in the next Union Budget.
GAAR to SAAR: General Anti-Avoidance Rules (GAAR) are aimed at curtailing tax avoidance and empower authorities to deny benefits to arrangements not having any commercial substance other than achieving tax benefit. Tax avoidance is legal but large-scale revenue loss can occur due to aggressive tax planning. To counter this, GAAR provisions were introduced recently. India also has Double Taxation Avoidance Agreements (DTAA) with many countries and these will override the GAAR except when there are Impermissible Avoidance Arrangements (IAAs). India could also introduce Specific Anti Avoidance Rules (SAAR), aimed at individuals on case by case provisions.
Reforms expected in Goods and Services Tax: While being introduced GST was called the “Good and Simple Tax” but unfortunately due to the compliances and complications it is neither simple nor good. Falling GST collections and increasing compensations to States have further complicated the problems. The Government’s priority should be to sort out the mess GST has created.
E-Invoice, Q-R codes and invoice reference number: Electronic Invoice (e-Invoice) is a system in which “Business to Business” (B2B) invoices are authenticated electronically by GST Network (GSTN) for further use on the common GST portal. Under the proposed electronic invoicing system, an identification number will be issued against every invoice by the Invoice Registration Portal (IRP) to be managed by the GSTN. E-invoicing will be mandatory from April 1, 2020, for businesses having a turnover of Rs 100 crore or more. It will start on a voluntary and trail basis from January 1, 2020, if the turnover is Rs 500 crore or more and from February 1, 2020, if it is Rs 100 crore or more. It is applicable for B2B invoices only and the QR code is required to be mentioned on B2C invoices. It is applicable on domestic B2B sales, export sales and sales to SEZ units. Web portals for the same have been notified recently.
New GST returns: In the GST Council meeting held on May 24, 2018, on the recommendation of the Group of Ministers on IT simplification, the GST Council vowed to introduce New Simple Returns for GST compliances. The formats of the new returns like ANX-1, ANX-2, RET-1/2/3 are in the public domain and would be available for trial from January. But as ANX-1 and ANX-2 are equivalent to GSTR-1 and GSTR-2 it would be interesting to watch whether these new returns will ease off the burden of compliance from the taxpayers or further complicate the current problem.
New GST Annual Return forms: If someone has to understand the mess created by GST compliances then one has to see the position of GST Annual Returns. GST was introduced on July 1, 2017, and for the Financial Year (FY) 2017-18 returns were to be filed by December 31, 2018. Now the date has been further extended to January 31, 2020. Three years after GST was introduced, the Government is yet to provide a simple form for Annual Return. Till the third week of December, the Government was working on providing a new utility/form for returns for FY 2017-18. So when will returns for FY 2018-19 and FY 2019-20 be filed?
Real-time availability of ITC: Input Tax Credit (ITC) is the spirit of GST and seamless credit is its backbone. But the falling GST collections forced the Government to introduce provisions against the spirit of GST by restricting 20 per cent credit over and above the matched GST (GSTR-2A) in November and then to 10 per cent in the December 18 GST Council meeting. If the economic slowdown keeps on reducing GST Collections then the Government would allow only Real Time-matched GST. This may force corporates to deal only with large enterprises and may be detrimental to the MSME sector.
Compensation to States: When GST was introduced the Centre promised States compensation for losses, if any, for collection of indirect taxes viz-a-viz GST. Growth at 14 per cent was promised and agreed upon. In the GST Council meeting, the Government asked States to agree to a growth rate of 10 to 12 per cent. This is lower than the promised compensation. Will the States agree to this or not would be seen later. Also, the Centre is not regular in its payments to States and the August compensation was released just a few days before the council meeting. The Government has largely missed its GST revenue collection target.A new year comes with new hopes and expectations for everyone but for the present dispensation at the Centre it has come with more challenges and complications on the taxation front.
(Writer: Abhishek raja; Courtesy: The Pioneer)