With little flexibility to change rates or to redefine the tax base, it is expected that the rate of growth in tax revenue will approximate GDP growth.
With an expected growth rate of 14 per cent in nominal GDP, the remaining gains in taxes are presumably expected from higher compliance or realisation of taxes due.
COVID-19 has upset fiscal maths around the world. With the need for a large fiscal support to economic activity, the question that will continue to preoccupy policymakers is how the costs may be recouped. It is in this context that the Union budget assumed significance this year. The expectations of tax breaks were rife on the presumption that this could boost economic activity whereas others called for a tax on stock market gains. Unyielding to such requests, the budget was based on a pragmatic approach to maintain the status quo.
India’s taxpayers’ base is limited. Nearly 60 per cent of corporate taxes are paid by the 0.06 per cent of the companies belonging to the top income bracket. On the other hand, among individual taxpayers, only 0.17 per cent report taxable incomes above Rs 25 lakh. Therefore, higher taxes would either yield little revenue or adversely affect economic activity. Alternatively, if as speculated, a cess was to be levied on income taxes, the revenue raised would be limited, say for 1 per cent this would amount to close to Rs 14,000 crore. Experts have since the onset of the pandemic pointed out the anomaly of a booming stock market disjointed from economic activity. Janet Yellen has suggested a mark to market-based tax on equity gains as a way to remedy the unequal impact of the pandemic in the US. However, the opportunity for the application of such a tax was missed and for India its ramifications for portfolio flows are added considerations. This does not mean that the current tax system does not need attention — countries such as the UK are re-examining their tax system — but it would require a long-term plan.
Given the circumstances, the announcements in the budget echo the need to shift focus to compliance and greater transparency in taxation than change in rates. In order to do so, two significant proposals have been made — the time period for reopening an assessment has been limited to three years except for cases where the tax involved is more than Rs 50 lakh; the introduction of the requirement for an assessment officer to provide facts on the basis of which he/she re-assesses, and the faceless Income Tax Appellate Tribunal (ITAT). Given that the government has committed to make the process of assessment faceless, it is important that the major causes for litigation are addressed. The limited window of re-opening cases for small taxpayers and due consideration of risk management strategy and the CAG’s observations in carrying out such assessments marks an improvement in the process, as such assessments will now have to be justified on the basis of facts rather than discretion.https://images.indianexpress.com/2020/08/1×1.png
Nevertheless, the introduction of faceless appellate tribunals that would reduce the interface between the tribunal and the assessee to the extent possible and introduce dynamic jurisdiction, requires further examination. The ITAT is the first level of appeal with independent adjudicators that provides an opportunity to the taxpayer to present their case. In fact, my research relating to transfer pricing cases in India finds that the timeline in case disposals by the tribunal has improved substantially over the years. To add to this, in more than 60 per cent of the cases, the taxpayer wins the appeal at the ITAT. It may, therefore, be worth considering how a dynamic jurisdiction, which may add to compliance burden or reduced interface, may help.
The Vivad se Vishwas scheme was launched in 2020 to address piling litigation and it is reported that collections under this scheme have been Rs 85,000 crore for 1,10,000 taxpayers. This is a small fraction as compared to the Rs 4.34 lakh crore in corporate taxes and Rs 4.49 lakh crore in income taxes that are locked in dispute. Therefore, a dispute resolution mechanism that allows for better interface between the taxpayer and the department may, in fact, be relatively beneficial.
With little flexibility to change rates or to redefine the tax base, it is expected that the rate of growth in tax revenue will approximate GDP growth. However, the budget estimates suggest that corporate tax and income tax collections are expected to increase by 22 per cent. With an expected growth rate of 14 per cent in nominal GDP, the remaining gains in taxes are presumably expected from higher compliance or realisation of taxes due. Whether this will pan out remains to be seen. Until then borrowings are the only alternative and what this means for future tax policy is a question that needs to be answered.
This article first appeared in the print edition on February 16, 2021 under the title ‘Tax regime change’. The writer is assistant professor, NIPFP