This article has been written by Garima Sisodia, pursuing the Certificate Course in Advanced Corporate Taxation from LawSikho.

Introduction

Economic growth which is further measured by the “Gross domestic product” and “Rate of unemployment” is the utmost important parameter for any country, to be examined carefully. Tax collection is the direct source of revenue for any government to ensure the availability of proper facilities to its citizens. A large sum of money is required to cater to the needs of society such as hospitals, infrastructure, schools, and other basic amenities. In other words, it is right to interpret that there exists a direct nexus between tax collection and economic growth. Now, the question arises how the tax collection can be maximized so that over the period; a substantial increase in the economic growth can be visible. There is a need to create a culture where citizens focus more on tax compliance rather than on tax evasion strategies. Once this benchmark is achieved, hindrance in the collection of tax will be no more a concern for the tax authorities.

Why does tax matter?

Tax is significant not only for the government but also for the people who are ultimately burdened with tax compliance. It becomes imperative for the fact that while framing the policies and laws concerning taxation due to concern should be given to the issues involving both the party of tax mechanism i.e. government and the people. There exists a complete circle of tax mechanisms where from the time of payment of tax by the people to the point administration of such tax collection by the tax authorities is necessary for overall success.

For any country to grow massively, the rate of production, employment rate, paying capacity of its citizens, and overall good standard of life is vital. In all this, tax plays a major role as one of the deciding factors for the people before making any investment whether domestically or globally. Investment on the other hand is crucial for any economy to grow at a rapid pace. Such investment also includes the component of attracting the global investors to place their money reliably which will ultimately help in building the large revenue for the economy to grow exponentially.

Issues with present laws

The High corporate tax rate

The rate of tax has a direct effect on the business decisions while carrying out the feasibility study in its pre-implementation phase. The Higher the rate of tax, the less is the availability of take away profit by the owner. This becomes the direct reason behind the taxpayer’s casual attitude towards the tax payment and more strong intention towards working out the ways to evade the tax as much as possible.

Social Disparity

In the present scenario, there is no clear demarcation between the high earning society and low earning society. As a result of which people belonging to lower-income families are not able to grow consistently and over time develop an attitude of resistance to the compliance of tax laws.

Changing scenario

In an era of globalization where there exist no boundaries on doing the business, there arise many challenges while doing the compliance as tax laws were incorporated keeping in the mind the situation prevailing at the time of their incorporation. However, now the entire scenario has been changed and existing tax laws no more efficiently serve the society in a way it should be done.

Lack of clarity

Present tax laws still need to be refined to fill the gaps of confusion and clarity in interpretation of law especially from the perspective of non-residents who want to undertake their businesses in India. A Lot of complexity discourages the morale of people in carrying out any transaction in any form.

Pending tax litigation

The current tax litigation generally takes at-least 12-13 years to get resolved. Presently, there are over Rs 4.96 lakh crore worth of income tax claims locked in litigation, with the Income Tax Appellate Tribunal (ITAT) having 92,338 pending cases, High Courts, 38,481 cases, and the Supreme Court, 6,357 cases. This large number of tax litigation is the sole outcome of lacunas in present laws which do not clearly define the timeline within which disputes should be settled. Such a long cycle of litigation is cumbersome not only for the taxpayer but also for the tax authorities as a large sum of revenue gets blocked beside paying the amount for hiring the services of senior counsel to represent it before the appropriate court.

Ease of doing business

Due to the confusion and complexity revolving around the existing laws, huge difficulties are faced by the corporates in running their business smoothly and efficiently. Most of them getting discouraged by the system to tend to focus their energy in structuring their income in such a way to avoid the payment of tax.

Need for Tax Reform

Since it has been more than 50 years that income tax has been drafted now the time has arisen to redraft the tax laws to bring it in line with the latest development in the global economy. This will not only upgrade the tax laws but also boost the development of a society where taxpayers consider the payment of tax as their moral obligation and not only the unwanted burden.

Evolution of Direct tax code

Keeping in mind all considerations, on August 12, 2009, the first draft of the “direct tax code” was released followed by the Revised discussion paper in the year 2010. Direct tax code was finally introduced in the parliament in 2010 and the government formed the standing committee of finance to discuss it in detail. Direct tax codes aim to fully replenish the Income-tax act 1961 with the new one to integrate the laws in one place and make it more simplified. This will also enable creating a taxpayer-friendly environment.

Proposed Changes in the Direct Tax Code

• The classification of income under the two heads i.e. ordinary source and special source. In ordinary sources, income is further classified into five sub-head such as:
  • Income from employment.
  • Income from business/profession.
  • Income from capital gain.
  • Income from house property.
  • Income from residuary sources.

On the other hand, the special source includes income by way of betting, winning a horse race.

• The concept of “Previous year and Assessment year” which creates a significant amount of confusion has been proposed to replace with just one concept i.e. “Financial Year”.
• There should be an increase in the slab rate so that there exists a less burden on small taxpayers. Such as:
  • Till Rs 2.5 Lakh– NIL.
  • Rs 2.5 lakh – 10 Lakh = 10% [with full rebate till Rs 5 Lakh].
  • Rs 10 Lakh – 20 Lakh = 20%.
  • Rs 20 Lakh- 2 Crore = 30%.
  • Rs 2 Crore and above = 35%.
• Adequate changes to be made in the current residence rules which say that person will be considered as a residence if he stays for a period of 182 days or more which is presently being misused by both the resident and non-resident.
• Certain guidelines should be made specifying the extent of the primacy of treaties over the Income Tax Act, wherein some cases, the application of Income Tax Act is necessary.
• Specific guidelines with regard to the applicability of the “General Anti Avoidance Rule” and how the dispute to be handled.

Conclusion

As rightly said by our honourable prime minister “Mr. Narendra Modi” – Transparent Taxation and honouring the honest is the epitome of success which can be achieved by bringing the necessary tax laws and scrapping the outdated ones. The Introduction of the “Faceless assessment, Faceless appeal, and tax charter” clearly reflects the urgency of reforming the old tax laws. As a result of such reform, the level of corruption which can be curbed is beyond one’s imagination. In an age of technology and unpredictable times such as a situation of pandemic (COVID-19), such reforms are productive not only for tax authorities but also for the taxpayer to a large extent. With the abolition of the dividend distribution tax by the finance bill 2020, the government has provided relief to the corporates who were earlier required to pay the tax on such dividends.

Interlinking of tax laws, growth, and taxpayers can be seen in the case of Brazil. Where the Brazilian government has introduced “Simple Nacional” intending to reduce the burden and simplify the process of tax collection for small and mid-sized corporations. This has resulted in overall tax costs by 8% and contributed to an increase of 11.6% in the business licensing rate, 6.3% increase in the registration of micro-enterprises, and a 7.2% increase in the number of firms registered with the tax authority.

Intending to create a society of taxpayers where they are willing to volunteer towards contributing the revenue has to go hand in hand with the required changes in the tax laws. Incorporating the tax laws is just one part whereas taxpayers abiding by such tax laws is the other part which in whole makes the tax mechanism an efficient system of the country.

Reference

• https://incometaxindia.gov.in/Documents/direct-tax-code-2010.pdf
• https://www.prsindia.org/theprsblog/amendments-proposed-draft-direct-taxes-code
• https://www.bloombergquint.com/law-and-policy/direct-tax-code-top-5-changes-recommended-by-the-committee-exclusive
• https://www.brookings.edu/wp-content/uploads/2016/06/09_effects_income_tax_changes_economic_growth_gale_samwick.pdf
• https://www.doingbusiness.org/en/data/exploretopics/paying-taxes/why-matters
• https://www.forbesindia.com/blog/economy-policy/modi-2-0-decoding-the-direct-tax-charter/

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.