Tax Policy in Trying Times

Context: COVID-19 pandemic has highlighted already existing deficiencies in the archaic Indian taxation system, for instance rising wealth of big companies while GDP is running in negative territory.

Indian taxation system

• Recent Government’s interventions:
  • Equalisation levy: Non-resident e-commerce operators were brought within the scope of this levy by the Finance Act of 2020. Online sales of goods and services will be taxed at 2%.
  • New scheme of faceless assessments and faceless appeals.
• Deficiencies and associated issues:
  • Rising inequalities during COVID-19:
    • Super rich became richer: GDP is contracting, but some stocks are surging to phenomenal heights
    • Unemployment and an increase in poverty levels along with the migrant crisis.
    • Lack of adequate fiscal stimulus: Merely 2% of the GDP in India, compared to Japan’s fiscal stimulus (21% of the GDP), Brazil’s (10%) and China’s (7%).
    • Rising corporate profits: at the expense of wages and small and medium enterprise profits.
    • Other gainers: Corporate houses, Internet service providers, laptop makers, scientists engaged in medical research, manufacturers of masks, and Personal Protective Equipment.
  • Tax avoidance: by global web companies has become acute because of digitalisation.
  • GST rate reduction: benefits not being transferred to the consumers by corporates.
• Way forward:
  • Amend Digital taxation: in accordance with the UN Model Convention.
    • Need for India to act in sync with the Organisation for Economic Co-operation and Development.
  • Strict implementation of Anti-Profiteering Rules under GST law: wherever there is a reduction in the tax rate on any commodity or service.
  • Change dispute resolution mechanism: in line with faceless assessments and faceless appeals.
    • Settlement through mediation and conciliation or, if necessary, arbitration in connection with tax disputes between the tax-paying companies and the Central Board of Direct Taxes.
    • Avoiding retrospective taxation as happened in the Vodafone taxation dispute case.
  • Government should make report of the Akhilesh Ranjan Task Force (on “rewriting the Income Tax Act”) public for a more informed discussion.

Conclusion: Along with the above suggestions,archaic laws should be modernised and made compatible with international tax laws to make them more compatible and in sync with the changing times.