India needs efficient tax system (Mint)

Mains Paper 3:Economy 
Prelims level: Direct tax code
Mains level: Indian Economy and issues relating to planning, mobilization, of resources

Context:

• India’s direct tax collections fell for the first time in two decades which has led to thedebate on the efficiency of our taxation system.
• Trend in India’s tax collection:
• In 16 years between 2002-03 and 2018-19, the number of individuals who filed taxreturns grew 62%, but the number of people who paid income tax rose by only 22%.
• The direct tax to GDP ratio fell to its lowest in 14 years, at 5.1 percent, while the indirecttax to GDP ratio was at a 5-year low in FY20.

Need for direct tax code:

• Poor tax to GDP ratio: The ratio is an indicator oftax compliance and the extent to which thegovernment is able to finance its expenditure.India's tax-GDP ratio plunged to 9.88% in FY20,lowest in 10 years. India is way behind OECDmembers with an average of 34 percent.
• To reduce complexities: The six-decade oldtax code (Income tax act 1961) consists of around700 sections is complex in nature. It has evolvedover time taking into account many amendments.
• Obsolete laws: The Income tax act was passed when the Indian economy was socialisticin nature with state control, with policy of input substitution, limited foreign trade andprotectionism.
• Low tax buoyancy: Tax buoyancy measures the responsiveness of tax mobilisation toeconomic growth. Despite impressive economic growth for the last decade, the taxbuoyancy has remained low.
• Narrow tax base: Out of 130cr population only 1.5 crore Indians pay income tax.
• Increasing population: Considering the scale of Indian population and demographics, taxadministration needs to take proactive steps in bringing more people within the taxfold.
• Poor Dispute resolution: Delayed decisions often culminating in the poor success rate ofthe tax department at various levels of legal dispute. For example, the success rate of thetax department at all three levels is under 30 percent for both direct and indirect taxlitigation.
• More Integrated economy: Since economic reforms of 1991, the economy has becomemore integrated, globalized, liberalized and new models of business have arisen.Therefore, the act needs to be redrafted and be made accommodative of the needs of thepresent as well as of the next few decades.
• Task force to draft new Direct tax code: Government had constituted a committee under AkhileshRanjan to draft a new direct tax law to replace the existing Income Tax Act, 1961.

Key recommendation:

• Single corporate tax: 25% corporate tax rate for all companies.
• Restructuring of slabs for personal income-tax: It has recommended sweeping changesto the personal income tax rates, with the creation of five slabs versus the currentthree:
• Rs 2.5-10 lakh: 10 percent (with a full rebate up to Rs 5 lakh)
• Rs 10-20 lakh: 20 percent
• Rs 20 lakh-2 crore: 30 percent
• Rs 2 crore plus: 35 percent
• It recommended doing away with the levy of surcharge.
• Incentives for promoting startups.
• Settling of tax disputes through mediation.
• A shorter and simpler direct tax law.
• Tax Treaties Vs Domestic Law: the committee has recommended the application of DTAAalong with domestic law, instead of the present system, where the tax entitycan choose its jurisdiction.
• Tax assessment proceedings be made faceless and an option be allowed to the public toseek clarifications on tax matters from Central Board of Direct taxes (CBDT).
• Use of Artificial Intelligence (AI) in the tax-compliance and administration process.
• Territorial taxation system: Taxation based on significant economicpresence irrespective of residential status of the corporation/individual.

Recent reforms in direct taxes:

• Simplification of corporate taxes: The Corporate Tax rates were reduced from 30percent to 22 percent and for new manufacturing units the rates were reduced to 15percent.
• Dividend distribution Tax was also abolished.
• Increasing transparency in official communication: Document Identification Number(DIN) wherein every communication of the Department would carry a computergenerated unique document identification number.
• Pre-filling of income tax returns to make compliance more convenient for individualtaxpayers. Compliance norms for startups have also been simplified.
• Direct Tax Vivad se Vishwas scheme: It was introduced in budget 2020-2021to reduce litigations related to the direct tax payments and to bridge the gap regarding a
• shortfall in revenues.
• Transparent Taxation – Honoring the Honest: The focus is on making the taxsystem more people-centric and public friendly.
• Taxpayer’s charter: The charter is a document that lists a taxpayer’s rights andobligations. However, charter cannot be enforced, unless backed by legislation.

Need for Tax payers Charter:

• Issues Emphasized by the 2014 tax administration reform commission.
• Citizens charter with the Sevottam framework was adopted by the tax department in1998. But it is ineffective due to non-statutory nature and lack of accountabilitymechanisms.
• An ombudsman to bring accountability in the tax departments has proved ineffective.
• Issues related to privacy and confidentiality, non-coercive measures of collection, crossborder procedures, retrospective taxation guidelines are still prevalent.

India’s new charter includes:

• Confidentiality, right to representation and fair treatment which are in line with globalpractices.
• India’s citizen charter also specifies timelines for completion of different administrativeprocesses.
• India’s charter conveys a commitment to reducing compliance costs in administering taxlegislation, holding its authorities accountable and publishing a periodic report of service
• standards.
• To end personal interface, e-assessment was introduced in 2019, wherein a taxpayercould digitally respond to any query related to their return.
• It seeks to automate the case selection and the distribution function of the assessingofficer assessment.

Way forward:

• Effective Grievance redressal mechanism: A tax ombudsman is needed to ensure thatsome of these standards are met.
• Fair and impartial system and a time-bound resolution of matters: the new processes,with reviews and anonymity, must ensure efficiency in case selection and consistency in
• assessment.
• Improve Tax GDP ratio: India must become a low-tax-rate, high-tax-compliance nationto improve Tax-GDP ratio.
• Proper implementation of the Tax charter: It is critical that the details of tax charter arespelt out concerning how these may be implemented in practice and there should be swift coordination for the implementation of the tax Charter.
• Formulate a predictable tax regime: It will attract long-term investment and lead to jobcreation.

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Prelims Questions:

Q.1)With reference to the latest Science and Technology Indicators (STI 2019-20), consider the following statements:
1. Nearly eight out of every ten patent applications filed in India in more than a decade have been by foreigners residing abroad.
2. Among the patents filed by foreigners, most are individuals or companies from the US, Japan and Germany, accounting for more than 45% of the patents in 2019-2020.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Questions:

Q.1) What is the need of direct tax code? Highlights the recommendations from government relating to direct tax reform.