Tax Regime Change

Context: Amid demand for tax cut to boost economic activities and tax on stock market gains, Budget signals focus on improving tax compliance and increasing transparency.

Limitations of the Indian taxation system:

• Limited taxpayers’ base: higher taxes would either yield little revenue or adversely affect economic activity because -
  • Nearly 60% of corporate taxes are paid by 0.06% of the companies
  • Only 0.17% report taxable incomes above Rs 25 lakh.
• Missed opportunity to tax stock market gains: Experts have since the onset of the pandemic pointed out the anomaly of a booming stock market disjointed from economic activity.

Budgetary initiatives with regards to taxation system:

• Shifts focus to compliance and greater transparency in taxation (rather than a change in rates. Two significant proposals were made -

1. 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;
2. The introduction of the requirement for an assessment officer to provide facts based on which he/she re-assesses.
3. The faceless Income Tax Appellate Tribunal (ITAT).
   • This would reduce the interface between the tribunal and the assessee - introducing dynamic jurisdiction.
   • Positive outcomes: Reduce compliance burden - more than 60% of the cases, the taxpayer wins the appeal at the ITAT
4. Included Comptroller and Auditor General’s (CAG’s) observations in carrying out such assessments
   • Vivad se Vishwas scheme 2020: to address piling litigation; reported collections under this scheme have been Rs 85,000 crore for 1,10,000 taxpayers.

Way forward:

• Introduce a dispute resolution mechanism: that allows for a better interface between the taxpayer and the department.
  • Rs 4.34 lakh crore in corporate taxes and Rs 4.49 lakh crore in income taxes are locked in dispute.