The Gist of Yojana: January 2017
Tax Reforms: Past, Present and Future
Tax reforms are an integral part of the development process
of any country. Eve n developed countries such as the United Kingdom and the
United States, which are often the role models for developing countries such as
India, too undertook reforms in the last few years.
Take the United Kingdom. The Conservative Liberal Democrat
coalition government undertook reforms between 2010 and 2015. In the reforms
initiated in 2013, two million people were virtually removed from paying income
tax altogether when the Chancellor of the Exchequer presented the budget. The
raft of reforms brought about a rise in the personal allowance, which meant that
no one paid any tax until he or she earned more than £9,440. The threshold for
the higher rate of tax - above which people pay tax at 40 per cent - dropped
from £34,370 to £32,010, excluding the personal allowance.
At the same time the top rate of income tax fell in 2013-14 from 50 per cent
to 45 per cent for those whose taxable income exceeded £150,000.
Take a country like the United States. A symbol of free trade and an advanced
economy, it is a country that needs tax reforms very badly.
Realising this, two legislators are trying to deliver a broad
tax reform. Max Baucus, the Democrat who heads the Senate's tax-writing
committee, and D.ave Camp, his Republican counterpart in the House of
Representatives, have been at the exercise for the last three years; they have
been talking to people and floating ideas. Though any full plan is yet to
fructify, their principles are sound: lower tax rates for both corporations and
individuals, paid for by limiting or scrapping tax breaks.
So, India is no exception to tax reforms. Ever since economic
reforms were unveiled in the early 90s, tax reforms too became a crying need.
After much deliberation, the then government felt that any taxation system
should be reasonable, fair and non-discriminatory so that, both the individual
tax payer under the direct taxes category and the corporates and industry
accounting for bulk of the indirect taxes, became not only tax compliant, but
feel the social and civic obligation to pay taxes which are the core for any
government to undertake development projects.
So, tax reforms have been one dynamic process through
successive governments until 20 16. The principles have largely remained the
same a transparent, just, equitable and fair taxation system that was easy to
administer. Consistently, the governments of the day have been rationalising the
direct tax structure in such a way that the individual tax payer benefitted the
Year after year, though marginally, the ceiling on entry
level taxation was lifted and the taxation slabs have now been neatly and simply
structured into three slabs. 10 per cent, 20 per cent and 30 per cent flat for
incomes ranging between Rs 2.50 lakhs to Rs 5 lakhs to Rs 10 lakhs respectively.
That is, those earning less than Rs 2.50 lakhs paid no tax, between Rs 2.50 to
Rs 5lakhs paid at 1 o per cent and Rs 5 lakhs to Rs 10 lakhs at 20 per cent and
those above Rs 10 lakhs paid a flat 30 per cent tax on their incomes.
The corporate taxes' too have been rationalised. Besides a
plethora of excise and customs levies have been' made easier. In all these, the
main aim has been to encourage people to become tax complaint and bring in a
larger population into the tax net.
Even as the government brings more and more reforms to bring
more and more people into the net and raise the tax collection buoyancy, the
single most critical tax reform that stands out is the Goods and Services Tax (GST).
Virtually codifying all taxes into one so that manufacturers did not face the
burden of multiple taxation in the country and movement of goods becomes easier.
Let's see why the GST is a historic piece of legislation,
given the twists and turns and uncertainties it faced before it was finally
adopted by both, Houses of Parliament. The GST is expected to make consumer the
The GST is expected to be a legislative measure that will help transform the
economy ushering in transparency and most of all, bringing the concept of "One
Country One Tax" into fruition. The. tax rate under the GST regime will be kept
at "minimum workable rate" so that no state government ends up annoying its
people with a higher tax rate. The final rate is to be decided by the GST
Council. The bill will now have to be ratified by at least 16 of the 29 state
assemblies, which the Prime Minister hoped would be done at the earliest.
The GST forges a single economic zone for the country from a
thicket of overlapping federal and state taxes. The New York Times described the
legislation as the biggest tax reform since 1991 when India opened its markets
first. Potentially one of the most dynamic. economies in the developing world,
India is hampered by a bewildering array of state-by-state tax codes that
discourage doing business across state borders.
The GST replaces 15 existing state and federal taxes and could help India
increase its economic growth by 0.5 and two percentage points. The GST is in
keeping with the present governments' line of thinking of 'having cooperative
federalism wherein the Centre and the States work together for the nation's
benefit and where the states also get their due share. The government had
revised the tax revenue sharing formula to devolve more to the states to bring
them in line with the Centre's line of thinking of marching hand in hand.
It all began in 1991 when government embraced market reform
policies devolving more power to the states, including more taxes to them.
Succcssiv governments had felt the need for a tax overhaul as it became
incrca.ingly clear that overlapping tax codes blocked growth.
In the longer run, the GST is expected to attract foreign
investment reducing the cost of capital goods; raise manufacturing and exports,
increase tax collections and most importantly create jobs" the need of the hour.
The GST is being hailed as the mother of all economic reforms in India. Business
leaders and Corporate India claims that the change would have a profound effect
on their daily lives. It is expected that GST will put an end to "Tax Terrorism"
because industry says that under the plethora of taxes in States and the Centre,
it is currently "harassed and victimized" by multiple tax authorities. "Most of
the time, we are busy in complying with those taxation formalities, collecting
taxes, depositing taxes, submission of forms, our money stuck in the system, and
other issues," a spokesman of the industry is quoted as saying.
The vexatious issue between the Centre and States on GST has
been tax rates. States want high rates to maximize their revenue and the Centre
pushes for lower rates to prevent inflation from spiking. India's economy is now
growing at a robust 7.6 per cent enjoying the lowest inflation rate in decades.
Job growth is still not there and the corporate sector is still starved of funds
leading to a lull in the manufacturing sector. Much of the growth momentum is
being pushed by the services sector including the
IT and IT enabled services netting in valuable foreign exchange which now
stands at over US$ 370 billion.
Tax reforms don't end with GST. We still have another major
legislation to push through, the Direct Tax Code (DTC) that will simplify the
direct taxes structure further benefitting a large number of the population. The
Finance Ministry has indicated in 2016-17 budget that the direct tax code was
being scrapped. But the standing committee on Finance of Parliament has told the
Finance Minister that DTC provisions need to be brought forth as the next major
step towards reforming the tax reforms.
What does DTC entail? As envisaged by the government, it
seeks to replace the Indian Income Tax Act of 1961 by amending all laws relating
to direct taxes, namely income tax, dividend distribution tax, fringe benefit
tax and wealth-tax with a view to establishing an economically efficient,
effective and equitable direct tax system that can facilitate voluntary
compliance and help increase the tax-GDP ratio.
Another objective is to reduce the scope for disputes and
minimize litigation. It seeks to provide stability in the tax regime as it is
based on accepted principles of taxation and best international practices. It
will eventually pave the way for a single unified taxpayer reporting system. The
Highlights of the Direct Taxes Code: proposed measure has 319 sections and 22
schedules against 298 sections and 14 schedules in the existing IT Act, Once
enacted, DTC will replace archaic (older and no longer useful) Income Tax Act.
However, many provisions in the Income Tax Act will be a part of DTC as well.
Mutual Funds/ULIP will be dropped from 80C deductions: Income from
equity-oriented mutual funds or ULIP shall be subject to tax @ 5 per cent,
Fringe benefits tax will be charged to the employee rather than the employer.
Political contribution of up to 5 per cent of the gross total income will be
eligible for deduction.
Since a lot of thought has gone into the DTC, it cannot be wished away. While
nomenclatures could change, call DTC by another name, but certainly most of the
provisions are going to be retained for the benefit of the tax payer.
The Corporate sector has a huge bucket list for further tax
reforms, Abolition of the Minimum Alternate Tax (MAT), burying the ghost of
retrospective tax (the Vodafone/IT department crisis in realising arrears of
tax), phasing out tax holidays could reduce investments in SEZs, and restoration
of capital gains tax treatment for buy-back of shares.
GST is, thus, a giant leap for the country in tax reforms to
inspire confidence of manufacturers and investors to push the economy forward
and one can hope for a further slew of reforms in the 2016-17 budgets to propel
GDP growth further. While the government might take time on DTC or Corporate
India's bucket list, it is apparent that it will stay focused on the main
objective of making tax laws simple to make life easier for the individuals as
also business besides bringing in larger populations into the tax net and making
every Indian conscious of his social obligation toward paying taxes, making the
country more tax compliant.