Tax Reforms

Tax Reforms

An Inheritance Tax will help reduce Inequality

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Inheritance Tax and Land Value Tax (LVT)

Mains level: Taxation system in India;

Why in the news? 

A remark by Chairman of Indian Overseas Congress Sam Pitroda on implementing an inheritance tax as a tool of wealth redistribution has sparked massive debates.

The Negative Impact of Inequality:

  • Growth affected: Inequality harms growth in the medium-to-long run by reducing firm productivity, lowering labor income, and diverting resources away from essential rights like education.
  • Inequal Opportunity: In unequal countries like India, where one is born greatly influences lifetime outcomes, with almost a third of consumption variation being explained by the place of residence (state, city, or village).
  • Concentration of Wealth: The richest 1% holding 40% of India’s wealth underscores the vast wealth disparities that exacerbate inequality.
  • Skewed Distribution of Gains: Research indicates that the gains from India’s growth over the last two decades have disproportionately benefited high-income urban residents, further exacerbating inequality.

What is Inheritance Tax? 

  • An inheritance tax is a tax levied on the assets or wealth passed down from one generation to another upon the death of the owner.
  • Unlike a wealth tax, which is recurring and applied to all physical and financial assets an individual owns, an inheritance tax is a one-time tax specifically targeting intergenerational transfers of wealth.

 

How an Inheritance Tax could help reduce Inequality?

The Constitution mandates equality of status and opportunity, obliging the government to take steps to reduce disparities arising from accidents of birth.

  • Reduction of Wealth Concentration: By taxing large inheritances, an inheritance tax helps to redistribute wealth from the wealthiest individuals and families to the broader society.
  • Encouragement of Productive Investments: Inheritance taxes can encourage wealthy individuals to invest their wealth in productive activities rather than simply passing it down to heirs.
  • Incentive for Innovation: Critics may argue that inheritance taxes disincentivize innovation by reducing the incentive to accumulate wealth to pass on to future generations.
  • Funding for Public Expenditure: Revenue generated from inheritance taxes can be used to fund essential public services and social programs, such as education, healthcare, infrastructure, and poverty alleviation initiatives.
  • Historical Effectiveness: Historical examples, such as the estate duty in India between 1953 and 1985. It reduced the top 1% personal wealth share from 16% to 6% between 1966 and 1985.
Another approach is the Land Value Tax (LVT): The Land Value Tax (LVT) is a tax system that levies charges on the unimproved value of land. Unlike traditional property taxes, which take into account both the value of the land and the value of any buildings or improvements on the land, the LVT focuses solely on the value of the land itself.

 

Conclusion: Tackling wealth inequality requires a multifaceted approach that includes measures such as inheritance taxation, wealth taxation, and the Land Value Tax (LVT). These measures not only help to redistribute wealth and promote economic fairness but also contribute to fostering a more inclusive and prosperous society where opportunities are more evenly distributed.

Mains PYQ:

Q Comment on the important changes introduced in respect of the Long term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

The rising share of Personal Income Tax and Indirect Tax is a concern

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trend related to Taxes in India

Mains level: Concerns due to the rising share of personal income tax and indirect tax

Why in the news?

Recent data show that Personal Income Tax Collections have increased, while collections from Corporate Taxes have reduced.

The present context of the rising share of Personal Income Tax and Indirect Tax:

  • Shift in Tax Composition: The data illustrates a significant shift in the composition of tax revenue, with personal income tax forming a larger share compared to corporate tax. This trend is accentuated by the sharp decline in corporate tax following the 2019 tax cuts.
  • Progressive vs. Regressive Taxation: Direct taxes, such as personal income tax, are considered progressive as they are based on income levels, whereas indirect taxes, like GST, are regressive, impacting all consumers uniformly regardless of their income.
    • The increasing share of indirect taxes implies a heavier burden on lower-income individuals.
  • Trend in Tax Composition: Chart 2 demonstrates a historical trend where indirect taxes had been decreasing since the 1980s, whereas direct taxes were on the rise. However, recent years have witnessed a reversal of this trend, with indirect taxes increasing and direct taxes declining.
  • International Comparison: Comparisons with BRICS economies indicate that India’s effective personal income tax rate is among the highest. This implies that Indian taxpayers may face relatively higher tax rates compared to individuals in other emerging economies.

Concerns due to rising share of Personal Income Tax and Indirect Tax:

  • Impact on Middle and Lower Income Groups: The rising share of personal income tax and indirect taxes places a greater burden on poorer citizens and the middle class. This is particularly concerning as the majority of personal income tax filers fall within the ₹1 lakh-₹5 lakh annual income bracket, indicating that middle-income earners are disproportionately affected.
  • Comparison with BRICS Economies: Data comparisons with BRICS economies reveal that India’s effective personal income tax rate is among the highest. This suggests that individuals in India may be facing relatively higher tax rates compared to their counterparts in other emerging economies.
  • Concern for Equity and Economic Stability: The data underscores a growing concern regarding the equitable distribution of the tax burden. The heavier reliance on personal income tax and indirect taxes may exacerbate income inequality and strain the finances of middle and lower-income households.

Way Forward:

  • Progressive Tax Reforms: Implementing progressive tax reforms can help alleviate the burden on middle and lower-income groups. This could involve revising tax brackets and rates to ensure that higher-income individuals contribute proportionally more to tax revenue.
  • Enhanced Direct Tax Compliance: Improving direct tax compliance measures, such as increasing tax enforcement efforts and reducing tax evasion loopholes, can help enhance revenue collection from high-income individuals and corporations.

Mains PYQ 

Q What is the meaning of the term ‘tax expenditure’? Taking housing sector as an example, discuss how it influences the budgetary policies of the government. (UPSC IAS/2013)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

[pib] Net Direct Tax collections exceed 2023-24 target

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Direct Taxes and its types

Mains level: NA

Why in the news?

  • India’s net direct tax collections witnessed a remarkable growth of 17.7% in the fiscal year 2023-24, reaching ₹19.58 lakh crore.
    • This performance indicates a strong revenue stream for the government.

Direct Tax Collections Trends in this Fiscal

  • Notably, Personal Income Taxes (PIT) played a pivotal role in driving the surge, accounting for 53.3% of the total tax kitty, up from 50.06% in the previous year.
  • Conversely, the contribution of corporate taxes dipped to 46.5% from 49.6% in the preceding fiscal.
  • While gross corporate tax collections increased, net tax receipts from Corporates, adjusted for refunds, experienced a slight decline.

What Is Net of Tax?

The term net of tax refers to the amount left after adjusting for the effects of taxes. Net of tax can be a consideration in any situation where taxation is involved. In the financial industry, ‘gross’ and ‘net’ are two key terms that refer to before and after paying certain expenses.

It’s Significance:

  • Individuals and businesses often analyze before and after-tax values to make investment and purchasing decisions.
  • Net tax is also an important part of expense analysis when reviewing annual tax filings and the net income of businesses.

Types of Direct Taxes:

  • Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
    • The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Huge penalties are levied in case individuals do not file ITR.
  • Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property. In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
    • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
    • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.
  • Estate Tax: It is also called an Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
  • Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax. Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India are taxable. The below-mentioned taxes are also included under Corporate Tax:
    • Securities Transaction Tax (STT): The tax must be paid for any income that is earned via taxable security transactions.
    • Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
    • Fringe Benefits Tax: Companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
    • Minimum Alternate Tax (MAT): For zero-tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.
  • Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets.
    • Based on its holding period, tax can be classified into long-term and short-term. Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
    • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

PYQ:

[2014] The sales tax you pay while purchasing a toothpaste is a

(a) Tax imposed by the Central Government

(b) Tax imposed by the Central Government but collected by the State Government

(c) Tax imposed by the State Government but collected by the Central Government

(d) Tax imposed and collected by the State Government

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

On Irregularities in Vertical Devolution

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Devolution of Taxes

Mains level: Read the attached story

Introduction

  • Recent agitations and concerns raised by state governments highlight critical issues in the practice of fiscal federalism in India.
  • Kerala and Karnataka governments, supported by others, have underscored the urgency for the 16th Finance Commission (FC) to address vertical and horizontal inequalities in devolution

Also read:

Explained: Financial Devolution among States

Trends in Vertical Devolution

  • Shrinking Divisible Pool: Historically, the divisible pool consisted mainly of income taxes and excise duties shared with states. However, recent changes have seen the exclusion of certain taxes, like corporation taxes, from the divisible pool, reducing the share available for states.
  • Expansion of Cesses and Surcharges: Despite the GST implementation, new cesses and surcharges continue to be introduced, contributing to the exclusion of an increasing share of gross tax revenue from net proceeds, impacting vertical devolution.
  • Conflicting Data: Discrepancies in government-released information on the quantum of cesses and surcharges have raised concerns about transparency and accurate reporting, which are vital for assessing the true extent of vertical devolution challenges.

Financial Implications

  • Collection Trends: Disaggregated data analysis reveals a significant rise in the collection of cesses and surcharges over the past decade, with amounts not shared with states but retained solely by the Union government, exacerbating the vertical devolution imbalance.
  • Cumulative Collection: Cumulatively, substantial amounts have been collected as cesses and surcharges, depriving states of their rightful share and necessitating corrective measures to address historical wrongs in vertical devolution.

Challenges in Tied Transfers

[A] Nature of Transfers:

  • Central Schemes: The requirement for state contributions to centrally sponsored schemes and central sector schemes places a financial burden on states, undermining their fiscal autonomy and perpetuating a patron-client relationship with the Union government.
  • Conditionalities: Grants provided to states often come with conditionalities, such as labelling requirements, further limiting states’ flexibility in utilizing funds according to their specific needs.
  • Loan Nature: Most capital transfers to states are in the form of loans, adding to states’ debt burdens and constraining their financial freedom.

[B] Impact on Federal Dynamics:

  • Centralizing Tendency: Imposed conditionalities and the reliance on centrally sponsored schemes reinforce a centralizing tendency, eroding the principles of cooperative fiscal federalism and undermining states’ autonomy in fiscal matters.
  • Substitution of Untied Transfers: The substitution of untied transfers with centrally sponsored schemes introduces rigidity in Union-State relations, hindering effective collaboration and diluting the spirit of cooperative federalism envisioned in the Indian federal structure.

Scrutiny by Comptroller and Auditor General (CAG)

  • Non-Transfer of Funds: Instances of non-transfer or short transfer of collected amounts, as highlighted by the Comptroller and Auditor General (CAG), raise concerns about the effective utilization of funds and the transparency of financial management practices.
  • Consequences:
    1. Defeat of Collection Logic: The failure to transfer cesses and surcharges to the designated reserve funds undermines the intended purpose of their collection, leading to inefficiencies and potential misappropriation of funds.
    2. Ruse for Fund Diversion: The discrepancies in fund transfers raise suspicions regarding the true intent behind cesses and surcharges, with indications that they may serve as a means to divert funds away from the divisible pool for other government expenditures.

Deviations from Finance Commission (FC) Recommendations

[A] Assessment of Union Government’s Claims:

  • Retention of Gross Tax Revenue: While the retention of a portion of gross tax revenue by the Union government has a basis in constitutional provisions, the failure to adhere to FC recommendations on sharing net proceeds raises questions about the government’s commitment to equitable fiscal federalism.
  • Failure in Net Proceeds Sharing: Analysis of the share of central taxes devolved to states against FC-stipulated percentages reveals consistent underperformance by the Union government, indicating a significant deviation from FC recommendations.

[B] Quantitative Analysis:

  • Shortfalls: Comparisons of actual devolutions with FC-recommended shares highlight substantial shortfalls, amounting to significant cumulative amounts over the years, representing a systemic failure in achieving equitable distribution of resources among states.
  • Cumulative Impact: The cumulative amounts not devolved to states underscore the magnitude of the fiscal imbalance and the urgent need for corrective measures to rectify historical injustices in vertical devolution.

Way Forward: Reform Agenda for the 16th Finance Commission

[A] Corrective Measures

  • Compensations to States: Addressing historical wrongs in vertical devolution requires compensatory measures to ensure fair resource distribution among states and rectify past imbalances.
  • Accurate Reporting: Mandating accurate reporting of “net proceeds” in budget documents is essential for transparency and accountability in fiscal management, enabling stakeholders to assess the true extent of resource allocation.
  • Addressing Shortfalls: Providing lump sum untied grants to states to offset past shortfalls in devolution is crucial to restoring states’ fiscal autonomy and promoting cooperative federalism.

[B] Legislative Action:

  • Limiting Cesses and Surcharges: Enacting legislation to impose strict limits on the collection of cesses and surcharges, with provisions for automatic expiry and prevention of rechristening, is necessary to prevent misuse and ensure transparency in revenue generation.

Conclusion

  • The stance of the 16th Finance Commission on vertical devolution is pivotal for the survival of fiscal federalism in India, requiring decisive action to address existing challenges and uphold the principles of cooperative federalism.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Why Centre plans to replace the Indian Stamp Act, 1899 with a new law

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Stamp Duty

Mains level: Read the attached story

stamp

Introduction

  • Stamp duty, a tax levied for registering various documents, plays a significant role in India’s financial landscape.
  • However, the existing Indian Stamp Act, 1899, has faced challenges with redundancy and non-uniform application.
  • To address these issues, the Ministry of Finance has introduced the ‘Indian Stamp Bill, 2023,’ seeking to revamp and modernize the stamp duty regime.

Understanding Stamp Duty

  • Nature of Stamp Duty: Stamp duty is a government tax levied for the registration of various documents, such as agreements and transaction papers, with the registrar.
  • Tax Calculation: The amount is typically a fixed value based on the document’s nature or a percentage of the agreement’s stated value.

Scope of Stamp Duty

  • Applicable Documents: Stamp duties are imposed on a range of documents, including bills of exchange, cheques, promissory notes, bills of lading, letters of credit, insurance policies, share transfers, debentures, proxies, and receipts.
  • Jurisdiction: While levied by the Central government, stamp duty revenues are collected by individual states within their territories, as authorized by Article 268 of the Constitution.

Indian Stamp Act, 1899

  • Fiscal Legislation: The Indian Stamp Act, 1899, is a fiscal statute governing the imposition of taxes in the form of stamps on transaction-recording instruments.
  • Instrument Definition: Under Section 2 of the Act, an “instrument” encompasses any document creating, transferring, limiting, extending, extinguishing, or recording any right or liability.
  • Stamp Characteristics: A “stamp” is defined as any mark, seal, or endorsement authorized by the State Government, including adhesive or impressed stamps, for the Act’s duty purposes.
  • Taxable Instruments: Section 3 of the 1899 Act specifies that certain instruments or documents are chargeable with amounts listed in Schedule 1 of the Act, including bills of exchange and promissory notes.

Reasons for the Indian Stamp Bill, 2023

  • Redundancy and Inoperability: The Ministry of Finance cites the redundancy and inoperability of several provisions within the Indian Stamp Act, 1899.
  • Lack of Uniformity: The absence of provisions for digital e-stamping and the lack of consistent stamp duty legislation across Indian states necessitate a new law.

Notable Provisions in the Draft Bill

  • Digital E-stamping: The draft Bill introduces provisions for digital e-stamping, enabling electronic payment of stamp duty.
  • Digital Signatures: It includes provisions for digital signatures, redefining “executed” and “execution” to mean “signed” and “signature,” incorporating electronic records and signatures as defined in the Information Technology Act, 2000.
  • Penalty Enhancements: The draft Bill proposes increased penalties, raising the maximum penalty from Rs 5,000 to Rs 25,000 for contravention of the law and imposing a daily penalty of Rs 1,000 for repeated offenses.

Conclusion

  • The ‘Indian Stamp Bill, 2023’ represents a significant step towards modernizing stamp duty laws in India.
  • By addressing the shortcomings of the existing legislation and introducing digital-friendly provisions, the bill aims to streamline and enhance the stamp duty regime, facilitating smoother transactions and compliance in the country’s financial landscape.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Tax contribution by States needs to be revisited

Note4Students

From UPSC perspective, the following things are important :

Prelims level: 16th Finance Commission

Mains level: inclusion of tax contribution, particularly from Goods and Services Tax (GST) and petroleum consumption, as a significant efficiency indicator in the distribution formula used by Finance Commissions to allocate Union tax revenue among states.

 

16th Finance Commission - INSIGHTSIAS

 

Central Idea:

The article advocates for the inclusion of tax contribution, particularly from Goods and Services Tax (GST) and petroleum consumption, as a significant efficiency indicator in the distribution formula used by Finance Commissions to allocate Union tax revenue among states. The authors argue that these measures provide a fair and stable representation of a state’s economic contribution to the national exchequer.

Key Highlights:

  • Finance Commissions play a crucial role in recommending the distribution of Union tax revenues among states.
  • Historically, tax contribution had less weight in the distribution formula, but it was completely dropped since the 10th Finance Commission.
  • The article contends that tax contribution, especially under the GST regime, is a reliable measure of efficiency, unlike other indicators like tax effort and fiscal discipline.
  • The authors propose that GST and petroleum consumption, being stable and indicative of income, should be given a substantial weight in the distribution formula.

Key Challenges:

  • Resistance from states that may perceive a potential shift in their shares based on tax contribution.
  • The stability of indicators like tax effort and fiscal discipline is questioned, making it challenging to assign them higher weights.
  • The need to ensure that the inclusion of tax contribution does not lead to unfair outcomes or discourage states from adopting progressive tax policies.

Key Terms:

  • Goods and Services Tax (GST): A unified consumption-based destination tax equally divided between the State and Central governments.
  • Tax Contribution: The amount of revenue generated by a state through taxes, considered as an efficiency indicator.
  • Finance Commission: A body responsible for recommending the distribution of Union tax revenues among states in India.

Key Phrases:

  • “Equity and efficiency in tax revenue transfers.”
  • “Tax contribution as an efficiency indicator.”
  • “GST and petroleum consumption as fair measures of states’ contributions to the national exchequer.”

Key Quotes:

  • “Tax contribution is an efficiency indicator because a State’s level of development and economic structure decides its tax contribution.”
  • “GST satisfies the criterion of stability in tax structure, making it an ideal efficiency indicator.”
  • “There is a persuasive case for the 16th Finance Commission to debate and include these ratios as a measure of efficiency.”

Key Statements:

  • “Since the 10th Finance Commission, tax contribution was dropped from the distribution formula.”
  • “GST is a consumption-based destination tax that is equally divided between the State and Central governments.”
  • “The Finance Commissions have always favored assigning more than 75% weight to equity indicators.”

Key Examples and References:

  • The article references the 15th Finance Commission’s distribution formula, which included tax effort, fiscal discipline, and demographic performance.
  • The stability of GST as an efficiency indicator is supported by calculations presented by the authors.

Key Facts:

  • The share of personal and corporate income taxes is 64% in Central tax revenue in 2021-22.
  • Finance Commissions historically assigned 10% to 20% weight to tax contribution in the distribution formula.

Key Data:

  • The weightage of tax effort in the 15th Finance Commission’s distribution formula was 2.5%, with demographic performance receiving a weight of 12.5%.
  • The recommended weight for equity indicators in the same formula was 85%.

Critical Analysis:

The article provides a compelling argument for the inclusion of tax contribution in the distribution formula, highlighting the stability and fairness of GST as an efficiency indicator. However, potential challenges such as resistance from states and the need for careful consideration to prevent unintended consequences are acknowledged.

Way Forward:

The authors suggest that the 16th Finance Commission should actively debate and consider including GST and petroleum consumption with a substantial weight in the distribution formula. This, they argue, would better represent states’ contributions to the national exchequer and promote efficiency in resource allocation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Direct Tax Collections cross 80% of 2023-24 target

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Direct Taxes

Mains level: Read the attached story

Introduction

  • India’s net direct tax collections have achieved a significant milestone, reaching ₹14.7 lakh crore by January 10, which is over four-fifths of the fiscal year’s target.
  • This performance indicates a robust growth of 19.4% compared to the same period in the previous fiscal year, showcasing the country’s strong economic recovery and efficient tax administration.

Overview of Tax Collection Performance

  • Total Collections: The net direct tax collections stood at ₹14.7 lakh crore, marking an achievement of 80.61% of the budget estimates for the fiscal year 2023-24.
  • Growth Rate: This represents a 19.41% increase over the net collections for the corresponding period of the last year.
  • Gross Collection Growth: The gross direct tax collections rose by 16.77% to ₹17.18 lakh crore, with Personal Income Tax (PIT) inflows increasing by 26.11% and Corporate Income Tax (CIT) by 8.32%.

Detailed Analysis of Tax Collection

  • Post-Refund Growth: After adjusting for refunds, the net growth in CIT collections was 12.37%, and PIT collections saw a rise of 27.26%.
  • Increase in PIT and STT Receipts: Net of refunds, PIT and Securities Transaction Tax receipts were up by 27.22%.

What are Direct Taxes?

  • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
  • The tax is paid directly by the organization or an individual to the entity that has imposed the payment.
  • The tax must be paid directly to the government and cannot be paid to anyone else.

Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

(1) Income Tax:

  • Depending on an individual’s age and earnings, income tax must be paid.
  • Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
  • The taxpayer must file Income Tax Returns (ITR) on a yearly basis.
  • Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.

(2) Wealth Tax:

  • The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
  • In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
  • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
  • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

(3) Estate Tax:

  • It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

(4) Corporate Tax:

  • Domestic companies, apart from shareholders, will have to pay corporate tax.
  • Foreign corporations who make an income in India will also have to pay corporate tax.
  • Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India is taxable.
  • The below-mentioned taxes are also included under Corporate Tax:
  1. Securities Transaction Tax (STT): The tax must be paid for any income that is earned via taxable security transactions.
  2. Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
  3. Fringe Benefits Tax: For companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
  4. Minimum Alternate Tax (MAT): For zero-tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

(5) Capital Gains Tax:

  • It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and homes come under capital assets.
  • Based on its holding period, tax can be classified into long-term and short-term.
  • Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
  • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increase. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organizations that can afford them. This extra money is used to help the poor and lower societies in India.

What are the disadvantages of direct taxes?

  • Easily evadable: Not all are willing to pay their taxes to the government. Some are willing to submit a false return of income to evade tax. These individuals can easily conceal their incomes, with no accountability to the law of the land.
  • Arbitrary: Taxes, if progressive, are fixed arbitrarily by the Finance Minister. If proportional, it creates a heavy burden on the poor.
  • Disincentive: If there are high taxes, it does not allow an individual to save or invest, leading to the economic suffering of the country. It does not allow businesses/industries to grow, inflicting damage to them.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Cyprus Confidential: Implications and Taxation Insights

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Cyprus Confidential

Mains level: Tax avoidance vs. evasion

Cyprus Confidential: Implications and Taxation Insights

Central Idea

  • The Cyprus Confidential investigation unveils a web of offshore entities controlled from India, shedding light on financial transactions orchestrated by individuals in India.

Cyprus Confidential and Its Scope

  • Global Offshore Probe: Cyprus Confidential explores 3.6 million documents, unveiling companies established in Cyprus by global elites.
  • International Collaboration: Over 270 journalists from 60 media outlets across 55 countries and territories participate in this investigation.
  • Data Sources: The investigation draws on documents from six offshore service providers in Cyprus, revealing not only Indian investors but also entities formed by prominent business conglomerates to leverage Cyprus’ favorable tax environment.

The Indian Perspective:

Setting Up Offshore Entities in Cyprus

  • Indian entities: The investigation aims to lift the secrecy surrounding offshore entities, exposing how they are controlled from India, with financial instructions originating from individuals within the country.
  • Legality: Establishing offshore companies in Cyprus is not illegal. India has Double Taxation Avoidance Agreements (DTAAs) with various countries, including Cyprus, offering advantageous tax rates.
  • Tax Residency Certificates: Companies utilize tax residency certificates in these countries to legally benefit from reduced tax rates. These jurisdictions are characterized by loose regulatory oversight and stringent secrecy laws.

India’s Tax Treaty with Cyprus

  • Pre-2013: Before 2013, India and Cyprus had a tax treaty exempting investors from capital gains tax, attracting substantial investments. Cyprus also had a low withholding tax rate of 4.5%.
  • 2013 Onward: India categorized Cyprus as a Notified Jurisdictional Area (NJA) in 2013, leading to higher withholding tax rates and transfer pricing regulations for transactions involving NJA entities.
  • Revised DTAA in 2016: A revised DTAA was signed in 2016, rescinding Cyprus from NJA with retrospective effect from November 1, 2013. This treaty introduced source-based taxation of capital gains and a grandfathering clause.

Tax Benefits in Cyprus

  • Tax Rates: Offshore companies and branches managed from Cyprus are taxed at 4.25%, while those managed from abroad and offshore partnerships enjoy complete tax exemption.
  • Dividends and Capital Gains: No withholding tax on dividends, and no capital gains tax on the sale or transfer of shares in offshore entities.
  • Estate Duty Exemption: No estate duty on the inheritance of shares in offshore companies.
  • Import Duty Exemption: No import duty on the purchase of vehicles, office, or household equipment for foreign employees.
  • Beneficial Owner Anonymity: Ensures anonymity of the beneficial owners of offshore entities.

India-Cyprus DTAA and Its Significance

  • Tax Planning: The DTAA enables Cyprus, with its favorable tax regime, to be a jurisdiction for tax planning. Foreign investors often set up investment firms in Cyprus to invest in India and benefit from the DTAA.
  • Alternative to Mauritius: Cyprus is now an alternative to Mauritius for establishing offshore entities for Indian investments, as dividends paid from India are subject to withholding tax but not to taxation in Cyprus.

Offshore Trusts in Cyprus

  • Cyprus International Trust Law: Offshore trusts under this law are exempt from estate duty and income tax, provided the trustee is Cypriot. Confidentiality is guaranteed.
  • Tax Avoidance: Offshore trusts allow businesspersons to avoid taxes they would have paid if income from overseas operations had been remitted to their country of residence.
  • Limitations of Indian DTAA: A DTAA does not prevent the Indian Income Tax department from denying treaty benefits if a company is found to have been inserted as a shareowner in India solely to avoid tax. In such cases, the entire transaction may be questioned.

Conclusion

  • The India-Cyprus offshore connection is a complex landscape with legal tax planning, secrecy, and regulatory challenges.
  • The Cyprus Confidential investigation has brought these nuances to light, prompting scrutiny and raising questions about the intricacies of offshore financial activities.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Report Calls for Global Minimum Tax on Billionaires

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Global Tax Evasion Report

Mains level: Call for tax on billionaires

Tax

Central Idea

  • The release of the ‘Global Tax Evasion Report’ marks a pivotal moment in the global fight against tax evasion.
  • This report serves as a comprehensive analysis of the state of global taxation and its implications.

About Global Tax Evasion Report

  • The ‘Global Tax Evasion Report’ is compiled by the EU Tax Observatory, a research institution specializing in international tax matters, established in 2021.
  • This inaugural edition of the report is the result of collaborative efforts involving over 100 researchers from across the globe, working alongside tax authorities.
  • It represents the first systematic attempt to analyze available data in the field of taxation.

Global Minimum Tax for MNCs

  • Established in October 2021 by 136 countries, including India, setting a 15% global minimum tax rate for MNCs.
  • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.

 

Tax Haven

A tax haven is a foreign country or corporation used to avoid or reduce income taxes, especially by investors from another country. A tax haven is a country or place that has a low rate of tax so that people choose to live there or register companies there in order to avoid paying higher tax in their own countries.

Key Findings of the GTE Report

The report uncovers the following pivotal findings:

  • Reduction in Offshore Tax Evasion: Wealthy individuals’ offshore tax evasion has significantly declined over the past decade, primarily due to the automatic exchange of bank information, resulting in a three-fold reduction in evasion.
  • Profit Shifting to Tax Havens: MNCs shifted approximately $1 trillion to tax havens in 2022, accounting for 35% of their global profits. This has led to a substantial loss in global corporate tax revenues, impacting approximately 10% of total collections, with U.S. multinationals playing a prominent role.
  • Global Minimum Tax Impact: The expected positive impact of the 15% global minimum tax rate on MNCs has been weakened by various loopholes.
  • Low Taxation for Billionaires: Billionaires globally often experience effective tax rates ranging from 0% to 0.5% of their wealth, utilizing shell companies to evade income taxes.
  • Aggressive Tax Competition: New forms of aggressive tax competition have emerged, eroding government revenues and exacerbating inequality.

Proposed solutions

  • Empowering ‘Automatic Exchange of Bank Information’: Launched in 2017 to combat offshore tax evasion by affluent individuals. Facilitated the sharing of deposit information with foreign tax authorities.
  • Global Minimum Tax on Billionaires: Proposes a 2% global minimum tax on billionaires, mirroring the model for MNCs, ensuring minimum tax rates for the wealthiest individuals.
  • Strengthening Global Minimum Tax for MNCs: Advocates for reinforcing the global minimum tax for MNCs while eliminating existing loopholes, potentially augmenting global corporate tax revenues by $250 billion annually.
  • Fair Allocation of Additional Revenues: Proposes mechanisms for equitable distribution of additional tax revenues generated by these measures among countries.

Conclusion

  • The GTE report illuminates substantial progress in curbing tax evasion while underscoring persistent challenges and reform opportunities.
  • The proposed solutions aim to foster international collaboration in addressing tax-related issues and promoting fiscal equity on a global scale.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Direct Tax Collections surged by 21.8%

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Direct Taxes

Mains level: Not Much

Central Idea

  • India’s net direct tax collections have surged, exceeding over half of this year’s Budget estimates.
  • By October 9, the collections had grown by 21.8% to reach ₹9.57 lakh crore.

Factors Driving Tax Collections

  • Personal Income Tax Growth: Personal income tax collections have seen a remarkable increase of 32.5%, reflecting higher income levels and tax compliance among individuals.
  • Corporate Tax Revenues: Corporate tax collections grew by 12.4%, reflecting improved corporate earnings and economic recovery.
  • Budget Surpassing Collections: The robust growth has already surpassed over 50% of the Budget estimates for the fiscal year.

What are Direct Taxes?

  • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
  • The tax is paid directly by the organization or an individual to the entity that has imposed the payment.
  • The tax must be paid directly to the government and cannot be paid to anyone else.

Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

(1) Income Tax:

  • Depending on an individual’s age and earnings, income tax must be paid.
  • Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
  • The taxpayer must file Income Tax Returns (ITR) on a yearly basis.
  • Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.

(2) Wealth Tax:

  • The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
  • In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
  • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
  • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

(3) Estate Tax:

  • It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

(4) Corporate Tax:

  • Domestic companies, apart from shareholders, will have to pay corporate tax.
  • Foreign corporations who make an income in India will also have to pay corporate tax.
  • Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India is taxable.
  • The below-mentioned taxes are also included under Corporate Tax:
  1. Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
  2. Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
  3. Fringe Benefits Tax: For companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
  4. Minimum Alternate Tax (MAT): For zero-tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

(5) Capital Gains Tax:

  • It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and homes come under capital assets.
  • Based on its holding period, tax can be classified into long-term and short-term.
  • Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
  • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increase. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organizations that can afford them. This extra money is used to help the poor and lower societies in India.

What are the disadvantages of direct taxes?

  • Easily evadable: Not all are willing to pay their taxes to the government. Some are willing to submit a false return of income to evade tax. These individuals can easily conceal their incomes, with no accountability to the law of the land.
  • Arbitrary: Taxes, if progressive, are fixed arbitrarily by the Finance Minister. If proportional, it creates a heavy burden on the poor.
  • Disincentive: If there are high taxes, it does not allow an individual to save or invest, leading to the economic suffering of the country. It does not allow businesses/industries to grow, inflicting damage to them.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Vivad se Vishwas II Scheme launched

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Vivad se Vishwas II Scheme

Mains level: NA

vivaad se vishwas

Central Idea

  • The Centre has launched the Vivad se Vishwas II scheme, a one-time settlement scheme, to effectively resolve pending contractual disputes with vendors or suppliers to the government and its undertakings.

Vivad se Vishwas II Scheme

  • The scheme was announced in the Union Budget 2023-24.
  • It aims to settle government and government undertakings’ contractual disputes wherein arbitral awards are challenged in courts.
  • The Vivad Se Vishwas I scheme was announced under Union Budget 2020 to reduce ongoing legal disputes under direct taxation.
  • Around 150,000 cases were resolved with the recovery of about 54 per cent of the amount under litigation.
  • The scheme was started in March 2020, and closed on March 31, 2021.

Key details about the Scheme

  • Deadline and Guidelines: The scheme sets an October 31 deadline for firms to submit their claims for consideration. The Department of Expenditure had earlier issued guidelines for its operation in late May.
  • Eligibility: The scheme applies to domestic contractual disputes where one of the parties is either the Government of India or an organization working under its control.
  • Cut-off Dates: To be considered for settlement, an arbitral award must have been secured by the aggrieved party by January 31, 2023, while the cut-off date for court orders is set at April 30.
  • Graded Settlement Terms: The scheme offers graded settlement terms based on the pendency level of the disputes. For cases involving court awards, the settlement amount offered to the contractor can be up to 85% of the net amount awarded or upheld by the court. For arbitral awards, the threshold is “up to” 65% of the net amount.
  • Processing and Registration: Eligible claims shall be processed only through the Government e-Marketplace (GeM), which has developed a dedicated web-page for implementing this scheme. For Ministry of Railways’ contractors, claims can be registered on the Indian Railways E-Procurement System.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

With high GST on online games, death by taxes

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax reforms in news

Mains level: Tax on online gaming, advantages and impact on industry, Need for balanced approach

online

What’s the news?

  • The Goods and Services Tax (GST) Council recently decided to impose the top 28% slab on online gaming, horse racing, and casinos.
  • The government anticipates earning an additional Rs 20,000 crore per annum.

Nothing in this world is certain but death and taxes.” -Benjamin Franklin

Central Idea

  • The recent decision of the 50th GST Council to impose a staggering 28% tax on the total amount involved in online games has sparked concerns over the survival of an entire industry that employs a substantial workforce.

The Distinction between Games of Skill and Games of Chance

  • For more than 150 years, the legal system has distinguished between games of skill and games of chance.
  • While games of chance rely solely on luck and are akin to gambling, games of skill involve a level of competence, where the outcome is determined by the players’ abilities.
  • The Public Gambling Act of 1867 recognizes games of skill as distinct from gambling, offering a legal shield to the former.

What is the Rationale Behind Levying a 28% Tax on Online Gaming?

  • Revenue Generation: The primary objective is to generate additional revenue for the exchequer by taxing the booming online gaming industry, which has witnessed significant growth and popularity.
  • Consistency in the Tax System: Applying a 28% GST on online gaming activities is aimed at ensuring equal treatment of various forms of entertainment and recreational activities in the tax system.
  • Regulatory Control: The imposition of a higher tax rate may serve as a means of regulatory control over the online gaming industry, potentially influencing consumer behavior and promoting responsible gaming practices.
  • Foreign Investment Considerations: Setting a tax rate comparable to global standards may attract foreign investments in the online gaming sector while ensuring tax compliance within the industry.
  • Addressing Social Concerns: The government aims to address concerns related to excessive gaming and potential social issues by imposing a higher tax rate.
  • Boosting Government Revenues: The estimated annual revenue boost of Rs 20,000 crore highlights the government’s view of the online gaming industry as a lucrative source of tax collection.

Impact of 28% GST on the Online Gaming Industry?

  • Financial Burden on Players: The 28% GST on the entire amount pooled in online games may result in a higher financial burden on players, especially for those who do not win or participate frequently. This could discourage some players from engaging in online gaming activities.
  • Viability of the Industry: The higher tax rate may impact the industry’s viability, particularly for gaming companies and startups. It could lead to reduced revenues for the companies, affecting their ability to invest in game development and innovation.
  • Competitiveness: The increased tax rate may make Indian gaming platforms less competitive compared to international counterparts that might not be subject to such high taxation. This could lead to players shifting to offshore gaming platforms, impacting the domestic industry.
  • Employment in the Sector: The online gaming industry in India is a significant employer, providing direct and indirect employment to thousands of people. The higher tax rate may put financial strain on companies, leading to potential job losses and reduced opportunities for growth in the sector.
  • Impact on Foreign Investments: The higher tax rate could deter foreign investments in the Indian gaming industry, as investors may consider the tax burden and its potential effects on returns.
  • Consumer Behavior: The higher GST rate might alter consumer behavior, with some players reducing their spending on online games or looking for alternative sources of entertainment.
  • Potential Black Market: A high tax rate might incentivize some players to resort to black market or unregulated platforms to avoid the tax burden, leading to potential illegal activities and revenue losses for the government.
  • Regulatory Challenges: The implementation of a 28% GST on online gaming might pose regulatory challenges for both gaming companies and the government, especially in ensuring compliance and proper tax collection.
  • Innovation and Investment in the Sector: The higher tax rate may impact investments in research and development, innovation, and new game development within the industry.
  • Growth of E-sports: The higher tax burden on gaming companies may affect the growth of e-sports and competitive gaming in India, as organizers and sponsors may face increased financial pressures

Way Forward: The Need for Balanced Taxation

  • Engage Stakeholders: The government should engage in meaningful discussions with industry stakeholders, including gaming companies, players, and experts, to understand the unique challenges and opportunities in the sector.
  • Review Taxation Structure: Consider revisiting the current tax structure and exploring alternatives such as focusing on service fees rather than taxing the entire pooled amount. Aligning with global practices can lead to more sustainable and equitable taxation.
  • Promote Responsible Gaming: Allocate a portion of tax revenue to promote responsible gaming practices, player protection, and awareness programs to address potential social concerns.
  • Encourage Domestic Investment: Provide incentives and tax breaks to encourage domestic gaming companies to invest in research, development, and innovation, fostering the growth of the industry.
  • Support E-sports: Recognize the potential of e-sports and competitive gaming, and offer tax incentives to organizers and sponsors of e-sports’ events to stimulate the growth of the e-sport’s ecosystem.
  • Continuous Monitoring: Regularly monitor the impact of taxation policies on the industry, employment, and overall revenue collection. Adjust the policies as necessary to maintain a balanced approach.
  • International Collaboration: Collaborate with other countries and learn from their experiences in gaming taxation to refine and implement effective policies.

Conclusion

  • The decision to impose a 28% GST on the entire amount pooled in online games could be catastrophic for the industry. A more balanced approach, considering the industry’s employment potential and overall economic impact, is essential. By focusing on reasonable taxation and fostering growth, policymakers can ensure the survival and prosperity of the online gaming industry while still collecting revenue for the government’s coffers.

Also read:

Goods and Services Tax (GST)

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Tax can be an incentive

Note4Students

From UPSC perspective, the following things are important :

Prelims level: voluntary tax transparency, TTR etc

Mains level: voluntary tax transparency framework, benefits challenges and way ahead

Tax

What’s the news?

  • While India’s tax reforms have been awe-inspiring in magnitude and scale in recent years, the country needs a voluntary tax transparency framework to sustain its current economic growth.

Central Idea

  • As the Indian economy aims to surpass the $5 trillion milestone, focusing on sustainable growth has become paramount. Achieving this goal requires the active participation of key stakeholders, including the government, corporations, investors, and civil society. In this context, tax transparency emerges as a crucial catalyst for sustaining India’s economic growth.

What is meant by voluntary Tax Transparency?

  • Voluntary tax transparency refers to a proactive approach taken by organizations, businesses, or individuals to disclose their tax-related information and practices willingly and without any legal obligation. In this context, the term voluntary implies that there is no specific legal requirement or regulatory mandate forcing entities to disclose their tax-related information.

The Framework for Voluntary Tax Transparency

  • The proposed voluntary tax transparency framework aims to incentivize organizations operating in India, encompassing private companies, multinationals, and public-sector units, to disclose their strategies and approaches towards domestic and international taxation.
  • Moreover, these voluntary disclosures could be linked to the environmental, social, and governance (ESG) framework, creating a standard of commitment to sustainability for every company.

What is a tax transparency report (TTR)?

  • Globally, a tax transparency report (TTR) serves as a format for such disclosures, providing annual voluntary information on a company’s global tax strategies.
  • While some large companies voluntarily file these reports, the Base Erosion and Profit Shifting (BEPS) project initiated by the OECD is working towards addressing gaps and mismatches in international tax regulations, which, over the years, have allowed many multinationals to minimize their tax outgo through creative tax structuring.

Benefits of Tax Transparency

  • Economic benefits:
  • Tax transparency serves as a litmus test to assess each company’s contribution to India’s growth and provides valuable insights into corporate tax strategies.
  • It will attract international investors who prioritize transparency and responsible tax behavior, resulting in increased capital inflow, job opportunities, economic expansion, and overall prosperity.
  • Environmental benefits:
  • It will attract larger capital inflows, particularly in sectors like infrastructure and green energy.
  • It fosters healthy competition among companies, encouraging them to disclose tax strategies and engage in responsible tax practices, thereby improving their ESG scores.
  • Extending transparency to include environmental practices, such as reporting environmental taxes related to carbon emissions, plastic usage, waste management, and water consumption, incentivizes businesses to adopt greener practices.
  • Social benefits:
  • Tax transparency highlights a company’s contributions to areas such as social insurance, healthcare, and pension premium
  • Additionally, under governance disclosures, the framework motivates companies to align their ESG policies with tax behavior, promoting robust corporate governance practices, accountability, and transparency.

The Influence of Tax Transparency on Consumer Behavior

  • As India approaches the $5 trillion milestone and witnesses growing per capita income, the younger generation’s consumer behavior is undergoing a noticeable shift.
  • These individuals prioritize a company’s ESG performance when making purchasing decisions or evaluating job prospects.
  • Tax transparency, falling under the broader ESG umbrella, will play a significant role in influencing these choices.

Challenges for implementing voluntary tax transparency in India

  • Lack of awareness and understanding of the concept of voluntary tax transparency among companies and organizations. Many may not fully grasp the benefits and importance of voluntarily disclosing tax-related information.
  • Some companies may be hesitant to embrace voluntary tax transparency due to concerns about revealing sensitive financial information or competitive advantages.
  • India’s tax system is known for its complexity. Companies may find it challenging to navigate India’s complex tax system
  • The absence of clear regulations or guidelines on voluntary tax transparency
  • Companies may be cautious about how the public, investors, and other stakeholders will perceive the information disclosed voluntarily.
  • Smaller companies or organizations with limited resources might find it challenging to allocate time and effort to prepare and disclose voluntary tax-related information.

What India needs to do to promote voluntary tax transparency?

  • India should develop a well-defined voluntary tax transparency framework that incentivizes organizations, including private companies, multinationals, and public-sector units, to disclose their domestic and international tax strategies voluntarily.
  • Link tax transparency with the broader environmental, social, and governance (ESG) framework.
  • Social contributions and governance policies should also be considered as part of the disclosure.
  • Launch extensive awareness campaigns to educate businesses, investors, and the public about the benefits and significance of voluntary tax transparency
  • India can establish a voluntary framework for companies on the lines of TTR to solidify its economic foundations and cultivate a business environment cantered around integrity.
  • Set up a monitoring and evaluation mechanism to assess the effectiveness of voluntary tax transparency efforts regularly.
  • Ensure that India’s voluntary tax transparency framework aligns with international best practices and standards.
  • Ensure that the voluntary tax transparency framework does not hinder the ease of doing business in India.

Conclusion

  • India’s pursuit of becoming a global economic powerhouse demands sustained and responsible growth. Adopting a voluntary tax transparency framework will not only attract sustainable investments but also demonstrate India’s commitment to a greener, more socially responsible, and transparent business environment. By embracing tax transparency, Indian companies can become trailblazers in promoting sustainable development and fostering a prosperous future for the nation

Also read:

Levying the Wealth tax to reduce income inequality

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Tax Collection at Source (TCS) on Foreign Credit Card Payments: Understanding the Intent and Impact is VItal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Concepts: Tax Collection at Source (TCS) and Tax Terrorism

Mains level: Tax Collection at Source (TCS) on Foreign Credit Card Payments, Need, concerns and impact

TCS

Central Idea

  • The recent announcement regarding the applicability of tax collection at source (TCS) on foreign payments made through credit cards has sparked a range of emotive reactions and sweeping remarks. However, it is crucial to understand the concept and consequences of this measure and avoid unnecessary panic.

What is Tax Collection at Source (TCS) on Credit Card Payments?

  • TCS on credit card payments refers to the application of tax collection at source (TCS) on foreign payments made through credit cards.
  • When individuals use their credit cards for foreign transactions, a certain percentage of the transaction amount is collected as tax by the government at the time of payment.
  • This tax amount is then adjustable against the individual’s advance tax and final tax liabilities during the filing of their tax returns.
  • The purpose of TCS on credit card payments is to track foreign spending and ensure that individuals report their income accurately while encouraging tax compliance.
  • Applicability: TCS is applied when individuals use their credit cards for making payments in foreign currencies.
  • Tax Collection: A specific percentage of the payment amount is collected as tax by the government. This tax is collected directly by the credit card company or the payment processor.
  • Adjustable Tax: The tax amount collected through TCS is adjustable against the individual’s tax liabilities during the filing of their income tax returns. It is not an additional tax burden, but a prepayment of tax that can be adjusted against the final tax payable.
  • Purpose: TCS on credit card payments helps the government track foreign spending and ensure that individuals accurately report their income from foreign transactions.
  • Rates and Thresholds: The tax percentage and thresholds may vary based on government regulations. These rates and thresholds are subject to change from time to time.
  • Exclusions: Certain categories, such as education and medical expenses, may have lower tax rates or exemptions from TCS. Payments made using international debit or credit cards within a specified limit may also be excluded from TCS.

TCS

What is the Need for Changes in TCS?

  • Anomaly in Remittances: The Liberalised Remittance Scheme (LRS) allows individuals to remit a certain amount of money abroad without requiring prior approval from authorities. However, payments made through credit cards were not subject to the LRS limit, leading to an anomaly where significant foreign payments were being made without any restrictions.
  • Disproportionate Spending: The initial introduction of TCS on LRS remittances aimed to track foreign spending disproportionate to the reported income of individuals. It was an effort to ensure that individuals accurately disclose their foreign transactions and pay appropriate taxes on their foreign income.
  • Circumvention of the System: Despite the initial implementation of TCS, there were instances of individuals circumventing the tax collection process. This was done through various means such as splitting payments among multiple individuals, including minors and household staff, or absorbing the 5% tax as a cost without claiming it through tax returns.
  • Encouraging Tax Compliance: The intention behind TCS on credit card payments was also to encourage individuals to come forward and file tax returns. By imposing a tax collection mechanism, individuals are nudged to report their foreign income and fulfill their tax obligations.

TCS

Concerns over TCS on credit card payments

  • Increased Financial Burden: The higher TCS rate of 20% on certain categories, such as investments, gifts, donations, and overseas travel, has led to an increased financial burden for individuals making such payments. The higher tax rate may impact individuals’ disposable income and affect their spending patterns.
  • Impact on Foreign Travel: With the application of TCS on credit card payments for foreign travel, individuals may face additional costs and may need to adjust their travel budgets accordingly. This could discourage some individuals from undertaking foreign travel or limit their spending while abroad.
  • Administrative Challenges: The implementation of TCS on credit card payments poses administrative challenges for credit card companies, payment processors, and individuals. It requires proper mechanisms to collect and remit the tax, as well as ensure accurate reporting and compliance. Compliance with these requirements may add complexity to the payment process.
  • Concerns of Double Taxation: Some individuals express concerns about potential double taxation. They argue that since they are already paying taxes on their income, applying TCS on credit card payments can be seen as an additional tax burden on the same income.
  • Impact on Economic Growth: Critics argue that the higher TCS rate and additional tax burden on certain payments may hinder economic growth. It is feared that this could discourage investments, limit foreign spending, and affect sectors such as tourism and hospitality.
  • Perception of Tax Terrorism: The introduction of TCS on credit card payments has led to criticism of the overall tax system, with terms like “tax terrorism” being used. Critics argue that the tax collection measures may be seen as excessive and could create an atmosphere of fear and uncertainty among taxpayers.

Facts for prelims: Concept box from Civilsdaily

What is mean by Tax Terrorism?

  • Tax terrorism refers to a situation where taxpayers feel harassed, intimidated, or unfairly treated by tax authorities, leading to a perception of aggressive or punitive actions.
  • In simple words, it describes instances where taxpayers believe that the tax system or tax authorities are causing undue stress, fear, or anxiety.

Illustration: Understand tax terrorism this way

  • Let’s say an individual receives a notice from the tax authority demanding extensive documentation and explanations for every financial transaction they have made over the past five years. The individual feels overwhelmed and stressed due to the complexity and scope of the request.
  • Despite providing the necessary information and cooperating fully, they face repeated audits, additional scrutiny, and prolonged delays in the resolution of their tax matters.
  • This experience leaves the individual feeling unfairly targeted and harassed by the tax authority, leading to a perception of tax terrorism.

Way forward

  • Transparent Communication: The government should engage in transparent communication to clarify the rationale behind the implementation of TCS on credit card payments. Clear and accessible information about the purpose, impact, and benefits of the policy can help alleviate concerns and misconceptions among taxpayers.
  • Stakeholder Consultation: The government should actively engage with stakeholders, including taxpayers, industry associations, and experts, to understand their concerns and gather feedback. This can help in refining the policy and addressing any unintended consequences.
  • Review and Revision: Regular reviews of the TCS policy should be conducted to assess its impact on individuals, sectors, and the economy. Based on the findings, necessary revisions can be made to strike a balance between tax collection objectives and the concerns of taxpayers.
  • Simplification of Tax Regulations: Efforts should be made to simplify tax regulations and compliance procedures to reduce the burden on taxpayers. Clear and user-friendly guidelines can help individuals understand and fulfill their tax obligations more easily.
  • Taxpayer Education and Assistance: Providing adequate taxpayer education and assistance is crucial to ensure compliance and address concerns. The government should invest in educational campaigns, workshops, and online resources to enhance taxpayer awareness and understanding of tax laws and procedures.
  • Efficient Dispute Resolution: Establishing efficient and timely dispute resolution mechanisms can help address grievances and concerns raised by taxpayers. Timely resolution of tax disputes and appeals can foster trust in the tax system and alleviate the perception of tax terrorism.
  • Balance between Tax Collection and Economic Growth: The government should strike a balance between tax collection objectives and promoting economic growth. Careful consideration should be given to the potential impact of TCS on sectors such as tourism and investments to ensure that the measures do not hamper economic development.
  • Continual Monitoring and Evaluation: Regular monitoring and evaluation of the TCS policy, along with its impact on tax compliance, economic growth, and taxpayer sentiment, should be conducted. This will enable the government to make informed decisions and adjustments as needed.

Conclusion

  • Misinterpretation of the recent announcement on TCS for credit card payments has led to unwarranted panic and exaggerated reactions. While concerns should be addressed constructively, it is essential to acknowledge the government’s efforts in simplifying the tax system, leveraging technology, reducing processing times, and resolving disputes. Collaboration between the government and taxpayers is crucial to fostering a fair, easy, and compliant taxation environment in the country.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Also read:

Levying the Wealth tax to reduce income inequality

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Income Tax Dept. surveys BBC over Transfer Pricing allegations

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Transfer Pricing

Mains level: Tax evasion issue by MNCs

tax

Central idea: The Income Tax Department has conducted surveys at the premises of the British Broadcasting Corporation (BBC) in Delhi and Mumbai. The BBC has been deliberately violative of transfer pricing rules.

Transfer Pricing: A Tax Evasion Technique

  • Transfer pricing refers to the practice of determining the price at which goods, services or intangible property are sold between related entities within an enterprise across international borders.
  • It is a practice of multinational companies transferring profits to low-tax jurisdictions to reduce their tax liabilities.

How does Transfer Pricing work?

  • The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in theopen market for 400 rupees.
  • Had A sold it (the good) direct, it would have made a profit of 300 rupees.
  • But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.
  • The transaction between A and B is arranged and not governed by market forces.
  • The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).

 

What is a ‘Survey’ under the I-T Act?

  • Section 133A of the Income Tax Act, 1961 empowers the Income Tax Department to conduct surveys to collect hidden information.
  • I-T authority can enter any place of business or profession within their jurisdiction, verify books of account, and impound documents if needed.

What is an I-T search?

  • Section 132 of the Income Tax Act, which I-T Department to conduct searches when it has reasons to believe that someone is in possession of undisclosed income or property.

Differences between a survey and a search

  • A survey is a less serious proceeding than a search and can only be conducted during working hours on business days within the limits of the area assigned to the officer.
  • In contrast, a search can happen on any day after sunrise, and the entire premises can be inspected to unravel undisclosed assets, with the help of police.
  • While the scope of a survey is limited to the inspection of books and verification of cash and inventory, in a search, the entire premises can be inspected to unravel undisclosed assets, with the help of police.

Powers of the I-T authority during a search

  • The provisions for impounding or seizing the goods were introduced only by the Finance Act, 2002.
  • The Act says that during a search, an authorized officer can:
  1. Enter and search any building or place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing are kept;
  2. Break/open the lock of any door, box, locker, safe, almirah, or other receptacles for exercising the powers conferred by clause (i) where the keys thereof are not available;
  3. Seize any such books of account, other documents, money, bullion, jewellery, or other valuable article or thing found as a result of such search;
  4. Place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;
  5. Make a note or an inventory of any such money, bullion, jewellery, or other valuable article or thing.

What are Transfer pricing rules?

  • By setting transfer pricing rules, countries can ensure that companies pay taxes on profits generated within their jurisdiction.
  • Transfer pricing rules are used to determine the “arm’s length price” at which transactions between related entities should take place.
  • The arm’s length price is the price that would have been charged between unrelated entities in similar circumstances.
  • The rules aim to ensure that related entities do not shift profits to low-tax jurisdictions, and that the tax authorities of different countries get their fair share of taxes.

What is the role of tax authorities in curbing transfer pricing?

  • Audit: The tax authorities can carry out transfer pricing audits to determine whether the prices used in transactions between related entities are in accordance with the arm’s length principle.
  • Compliance of Arm’s length principle: If the tax authorities find that the prices are not in accordance with the arm’s length principle, they can make adjustments to the prices and levy taxes accordingly.

What is the “Arm’s Length Arrangement” that the BBC has allegedly violated?

  • Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price as “a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.
  • Section 92C(1) says arm’s length shall be determined by the “most appropriate” among the following methods:
  • comparable uncontrolled price method;
  • resale price method;
  • cost plus method;
  • profit split method;
  • transactional net margin method;
  • such other method as may be prescribed by the I-T Board.

What lies ahead for BBC?

  • BBC will have to comply with transfer pricing rules in each country in which they operate.
  • Failure to comply with transfer pricing rules can lead to tax liabilities and penalties.
  • Compliance with transfer pricing rules can be complex and require the assistance of tax experts.

Try this MCQ:

Q. Which government agency regulates transfer pricing rules in India?

A) Reserve Bank of India

B) Securities and Exchange Board of India

C) Income Tax Department

D) Ministry of Corporate Affairs

 

Post your answers here.
2
Please leave a feedback on thisx

 

Crack Prelims 2023! Talk to our Rankers

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Wealth Tax: Does It Distort the Economy Too Much?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: wealth tax

Mains level: Tax reforms and wealth tax In India

Wealth

Context

  • There is a good reason we do not tax wealth directly. Actually, there are many good reasons. But that’s not stopping some states from giving it a try. There are much more effective options for targeting wealthy people for tax revenue that are better for the economy. Some the US is already doing, such as state property taxes, federal capital gains taxes and estate taxes on inheritances.

Crack Prelims 2023! Talk to our Rankers

What is wealth tax?

  • Wealth tax is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
  • It aims to reduce the inequalities of wealth.
  • It is based on the market value of assets owned by a taxpayer and charged on the net wealth of super rich individuals.

Wealth

Why in news?

  • The new bills this week by California and Washington propose taxing their richest residents 1% to 1.5% each year.
  • Four other states including New York and Illinois propose taxing unrealized capital gains, or taxing wealth based on how much it grew in the last year whether or not you sold any assets.

Wealth

Crafting good tax policy starts with a question: How much will it distort economic behaviour?

  • Creates distortions: Many economists say that wealth taxes create the most distortions, followed by income and consumption taxes.
  • Wealth taxes discourage saving and investment: A 1% or 2% wealth tax may sound small, but it’s very large compared with current tax rates. Since it’s levied each year, it’s better compared to current taxes on realized capital income. These plans drastically reduce the return on risky investment, and rewarding risk is important for economic growth.
  • Unrealized capital gains, are much harder to measure: Income is relatively easy to measure. Your employer sends you money that is well documented and has an objective value. Overall wealth, especially unrealized capital gains, are much harder to measure.
  • Mostly rich people hold Wealth in assets: Very rich people also tend to hold a lot of their wealth in assets that aren’t publicly traded, either in private equity, in their own businesses, fine art, gold bars or other possessions.
  • Hard to implement effectively: Most jurisdictions have abandoned wealth taxes. They are very hard to implement at the federal level, let alone by states with fewer resources to collect and assess data on wealth holdings.
  • Example of Switzerland: A possible model is Switzerland, where individual cantons have their own wealth tax, but the tax accounts for a trivial share of tax revenue.
  • A wealth tax is a bad policy based on the economics and feasibility: Collecting it will require tremendous resources that states don’t have and it won’t produce the revenue they’re counting on.

Wealth Tax in India

  • Abolished wealth tax: The government abolished wealth tax as announced in the budget 2015. In its place, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. (Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher).
  • Abolished to simplify tax structure and discourage tax evasion: The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
  • No wealth tax at present: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.

Wealth

Way ahead

  • Promising that a few wealthy people can pick up the public tab is bad economics.
  • States would be better off making their consumption taxes larger and more progressive.
  • They can tax luxury goods like designer clothes, private jet travel or second homes heavily.
  • Governments can better enforce our existing wealth taxes by eliminating loopholes in capital gains and estate levies.

Conclusion

  • Wealth taxes will continue to be in the conversation as states and the federal government need more revenue and are reluctant to raise taxes on anyone who earns more than $400,000 a year. Many economists say that wealth taxes create the most distortions, followed by income and consumption taxes. Wealth taxes need to studied not only from the lens of fiscal challenges that the states face but also market economies and probable distortions.

Mains question

Q. What is wealth tax? Highlight the present status of Wealth tax in India. It is said that Wealth tax distorts economic behaviour. Discuss in the context of States in the US proposes taxing the rich.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Making The Case for Wealth Tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Wealth tax and present status in India

Mains level: Rationale behind wealth tax

Wealth Tax

Context

  • The discourse on efficient, effective and equitable public spending often takes us into the realm of limited resources facing competing demands. India definitely needs to widen its revenue collection as well as base. In this context, it is important to discuss the need for levying a wealth tax, and levying it now.

Crack Prelims 2023! Talk to our Rankers

Why wealth needs to be taxed?

  • Accumulation of wealth: The most compelling reason stems from evidence that there has been massive accumulation of wealth in a few hands. A small section of people has access to a large share of economic assets and resources that remain almost completely untaxed and thus unavailable for public allocation.
  • Wealth without hard work: Wealth, much less than even income, has little to do with one’s education, merit or efforts; it is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes.
  • Income inequality: India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022.
  • Wealth of rich doubled in pandemic: An Oxfam report has highlighted how India’s richest doubled their wealth during the pandemic. This happened for a variety of reasons, including profits made on vaccines and commodity and asset price movements.
  • Wealth doesn’t translate into productive resources: But the fact remains that India, despite facing grave financial and economic challenges, has no means to convert any of this growing wealth into productive resources that can generate employment opportunities and push up the incomes of multitudes, which in turn can drive demand for goods something that is needed to counter an economic drag-down.

What is the government’s attitude towards wealthy?

  • Rich knows how to invest: One may argue and it is common to hear this that wealth is better left to the wealthy, as they know best how to invest. This has not been in sufficient evidence, at least in India.
  • Corporate tax lowered: The government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment.

Wealth Tax

History of Wealth taxation in India

  • Wealth tax: Wealth tax, which is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
  • Capital gains tax: Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base.
  • Estate duty: India scrapped its estate duty in 1985 and has no inheritance tax. Although the receipt of gifts is subject to income tax in the beneficiary’s hands, it has various exemptions; it is almost entirely exempt if received from within the family, including the extended family of self and spouse.
  • Exemption leads to accumulation: These exemptions shrink the base significantly, as most accumulated wealth is acquired through family, and that remains outside the gift tax’s ambit. Given the cultural context of wealth inheritance, some exemptions make sense, but upper thresholds can be easily added to make it more effective.

Present status of wealth taxation

  • No wealth tax: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms.
  • One time solidarity tax: It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.
  • Example of developing countries: A number of Latin American countries, including Argentina, Peru and Bolivia, have either introduced or are introducing a progressive annual wealth tax levied on the wealth gains of each year or a one-time covid ‘solidarity’ tax.

Wealth Tax

Conclusion

  • Idea of wealth tax appear good on paper however; it may negatively impact the domestic and foreign investment in the country. Direct tax slab for superrich in India is already among the highest in the world. The idea of wealth taxation needs careful deliberation before implementation.

Mains Question

Q. Comment on history of wealth tax in India. why wealth tax is necessary in India? elaborate.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

All Sikkimese women must be allowed to get IT relief: SC

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Merger of Sikkim

Mains level: Read the attached story

The Supreme Court in a judgment, held that exclusion of Sikkimese women who marry non-Sikkimese men after April 1, 2008 from exemptions under the Income Tax Act is unconstitutional and amounts to gender discrimination.

What is the news?

  • The top court’s verdict came on appeal filed by the Association of Old Settlers of Sikkim and others seeking striking down of Section 10(26AAA) of the Income Tax Act, 1961.
  • More particularly, the definition of “Sikkimese” in Section 10 (26AAA) to the extent it excludes Indians who have settled in Sikkim prior to the merger of Sikkim with India on April 26, 1975.

The story of Sikkim

  • Sikkim witnessed 333 years monarchical rule of Namgyal dynasty under whose reign there many invasions, foreign interference, accession and annexation.
  • On 28th March, 1861 Sikkim became a formal protectorate of the British Government and on 16th May, 1975 it became the 22nd state of the Indian Union.
  • In erstwhile Himalayan Kingdom of Sikkim, no legal rights were conferred to Sikkimese women.
  • However, after Sikkim’s merger with India such Regulations relating to Sikkim citizenship have become futile and non-operational.

How women rights in Sikkim are different from that of mainstream India?

The status of rights conferred to Sikkimese women is different from that of women in India. Certain conditionality were imposed upon their property or inheritance right such as the following:

  1. Immovable property inherited, gifted or purchased by women married to non-locals cannot be transferred and registered in their names.
  2. Immovable property of a Sikkimese woman cannot be transferred or registered to her legal heirs if her husband is non-Sikkimese.
  3. Mandatory requirement for Sikkimese women to submit an “unmarried certificate in all government procedures”.
  4. Identity of women is to be based on the identity of not one, but two men. A Sikkimese woman will be considered Sikkimese only if both, her father and husband are also Sikkimese

Issues with such regulations

  • Unconstitutional: The discrimination is based on gender, which is wholly violative of Articles 14, 15 and 21 of the Constitution.
  • Gendered bias: It is to be noted that there is no disqualification for a Sikkim man, who marries a non-Sikkimese after April 1, 2008.
  • Associating identity to marriage: A woman is not a chattel and has an identity of her own, and the mere factum of being married ought not to take away that identity,” Justice Shah wrote.
  • No legal basis: Sikkim has become a part of India and all Sikkim Subjects and all Sikkimese domiciled in the territory of Sikkim have become Indian citizens.

Note: Article 14 relates to equality before law, while Article 15 forbids discrimination on grounds of religion, race, caste, sex or place of birth, and Article 21 provides for right to life and personal liberty.

Way ahead

  • Legal reforms: The centre shall make an amendment to Explanation to Section 10 (26AAA) of IT Act, 1961, so as to suitably include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before April 26, 1975.
  • Ensure parity: The reason for such a direction is to save the explanation from unconstitutionality and to ensure parity in the facts and circumstances of the case.

 

 

Crack Prelims 2023! Talk to our Rankers

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Levying the Wealth tax to reduce income inequality

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Wealth tax

Mains level: Income inequality, Wealth tax and its necessity

Wealth tax

Context

  • The discourse on efficient, effective and equitable public spending often takes us into the realm of limited resources facing competing demands. India definitely needs to widen its revenue collection as well as base. In this context its time to consider a wealth tax.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

What is wealth tax?

  • Wealth tax is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
  • It aims to reduce the inequalities of wealth.
  • It is based on the market value of assets owned by a taxpayer and charged on the net wealth of super rich individuals.

Wealth tax

Wealth Tax in India

  • Abolished wealth tax: The government abolished wealth tax as announced in the budget 2015. In its place, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. (Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher).
  • Abolished to simplify tax structure and discourage tax evasion: The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
  • No wealth tax at present: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.

What is the need for levying a wealth tax?

  • High inequality: India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022.
  • Massive accumulation of wealth in a few hands: A small section of people has access to a large share of economic assets and resources that remain almost completely untaxed and thus unavailable for public allocation.
  • Capital gains tax has limited base: Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base.
  • Wealth largely depends on inheritance and privilege: Wealth, much less than even income, has little to do with one’s education, merit or efforts; it is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes.
  • India does not have inheritance tax: India scrapped its estate duty in 1985 and has no inheritance tax.
  • Almost entirely exemptions on gift tax: Although the receipt of gifts is subject to income tax in the beneficiary’s hands, it has various exemptions; it is almost entirely exempt if received from within the family, including the extended family of self and spouse. These exemptions shrink the base significantly, as most accumulated wealth is acquired through family, and that remains outside the gift tax’s ambit. Given the cultural context of wealth inheritance, some exemptions make sense, but upper thresholds can be easily added to make it more effective.

Wealth tax

Comprehensive PoV: Why wealth tax is necessary at present economic condition

  • Wealth of rich doubled during the pandemic but not channelised well to create productive resou: An Oxfam report has highlighted how India’s richest doubled their wealth during the pandemic. This happened for a variety of reasons. despite facing grave financial and economic challenges, has no means to convert any of this growing wealth into productive resources that can generate employment opportunities and push up the incomes of multitudes, which in turn can drive demand for goods something that is needed to counter an economic drag-down.
  • There is no sufficient increase in private investment: The government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment. Obviously, there is something else at work, and one cannot assume that accumulated wealth in private hands will necessarily be invested in the domestic economy.
  • Not only investment is important but also the right application is important: It is not only investment that is important, but also where that investment is going and whether it is creating employment opportunities for the youth.

Present status and economic projections

  • Data on youth unemployment: Data from diverse sources show high unemployment rates during May-July 2022 for the youth: 28.3% in the 15-24 age group and an even higher 43.3% for the 20-24 age-group.
  • Likely global recession overhead: The likelihood of a global recession and the related layoffs being announced by corporate giants will make the situation worse.
  • Jobless growth and wealth inequality: The recent economic growth experienced in India, especially in the post-covid recovery phase, has largely been jobless growth and can further deepen both income and wealth inequalities.
  • Economy cannot afford to have such high level of youth unemployment: No economy can afford to have such youth unemployment rates for long without adversely affecting economic growth and social cohesion.

Way ahead

  • A number of Latin American countries, including Argentina, Peru and Bolivia, have either introduced or are introducing a progressive annual wealth tax levied on the wealth gains of each year or a one-time covid ‘solidarity’ tax.
  • There is no reason why India cannot do so too. This is the right time to introduce a progressive wealth tax along with other fiscal steps that can directly reverse the trend of growing inequalities in the country.

Conclusion

  • India needs a shift in its fiscal policy, as suggested by a number of economists, to adopt measures that create employment opportunities and in turn drive demand for products made by small and medium level producers. This would also push up growth while not necessarily widening inequalities.

Mains question

Q. What is wealth tax? Why wealth tax abolished? Considering the present economic situation Discuss the need to levy wealth tax in India?

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Govt proposes Policy on Online Gaming

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Regulation of online gaming

The Ministry of Electronics and IT proposed an amendment to bring online gaming under the ambit of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021.

Regulating Online Gaming

The following draft amendments to the IT Act are being placed in the public for comments, feedback till January 17:

  • Due diligence: Online gaming intermediaries shall exercise due diligence to ensure that online games with gambling, betting are not permitted.
  • Withdrawals or refunds: Online gaming intermediaries shall inform users of policy for withdrawal or refund of deposit, distribution of winnings, applicable fees
  • Self-Regulatory Organisation: SRO will determine what constitutes prohibited wagering
  • Registration: Self-regulatory bodies will be registered with the MeitY
  • Online games: Self-regulatory bodies may register online games of intermediaries that are members and meet prescribe criteria.
  • Complaints’ redressal: Self-regulatory bodies will resolve complaints through a grievance redressal mechanism.

What is online gaming?

  • Online gaming can refer to any type of game that someone can play through the Internet or over a computer network.
  • Most of the time, it refers to video games played over the Internet, where multiple players are in different locations across the world.
  • Online gaming also can refer to the idea of gambling over the Internet, through an online casino or an online poker room.

Types of gaming

  • The types of online gaming include:
  1. E-sports (well-organized electronic sports which include professional players) ex. Chess
  2. Fantasy sports (choosing real-life sports players and winning points based on players’ performance) ex. MPL cricket
  3. Skill-based (mental skill) ex. Archery
  4. Gamble (based on random activity) ex. Playing Cards, Rummy

Why is the online gaming industry booming in India?

  1. Digital India boom in the gaming industry
  2. Narrowing of the digital divide
  3. IT boom

Other factors promoting the boom

  1. Growing younger population
  2. Higher disposable income
  3. Inexpensive internet data
  4. Introduction of new gaming genres, and
  5. Increasing number of smartphone and tablet users

Prospects of online gaming

  • State List Subject:  The state legislators are, vide Entry No. 34 of List II (State List) of the Seventh Schedule, given exclusive power to make laws relating to betting and gambling.
  • Distinction in laws: Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
  • Classification on dominant element: As such, a ‘dominant element’ test is utilized to determine whether chance or skill is the dominating element in determining the result of the game.
  • Linked economic activity: Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
  • ‘Game of Skill’ debate: Placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible. It is important to note that the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

Need for regulation

  • No comprehensive regulation:  India currently has no comprehensive legislation with regards to the legality of online gaming or boundaries that specify applicable tax rates within the betting and gambling industry.
  • Ambiguity of the sector: The gaming sector is nascent and is still evolving, and many states are bringing about legislation seeking to bring about some order in the online gaming sector.
  • State list subject: Online gaming in India is allowed in most parts of the country. However, different states have their own legislation with regards to whether online gaming is permitted.
  • Economic advantage: Well-regulated online gaming has its own advantages, such as economic growth and employment benefits.

Issues with online gaming

  • Gaming addiction: Numerous people are developing an addiction to online gaming. This is destroying lives and devastating families.
  • Compulsive gaming: Gaming by children is affecting their performance in schools and impacting their social lives & relationships with family members. Ex. PUBG
  • Impact on psychological health: Online games like PUBG and the Blue Whale Challenge were banned after incidents of violence and suicide.
  • Threat to Data privacy: Inadvertent sharing of personal information can lead to cases of cheating, privacy violations, abuse, and bullying.
  • Betting and gambling: Online games based on the traditional ludo, arguably the most popular online game in India, have run into controversy, and allegations of betting and gambling.

Why hasn’t a comprehensive law yet materialized?

  • Earlier, states like Tamil Nadu, Telangana, Andhra Pradesh, and Karnataka also passed laws banning online games.
  • However, they were quashed by state High Courts on grounds that an outright ban was unfair to games of skill:
  1. Violation of fundamental rights of trade and commerce, liberty and privacy, speech and expression;
  2. Law being manifestly arbitrary and irrational insofar as it did not distinguish between two different categories of games, i.e. games of skill and chance;
  3. Lack of legislative Competence of State legislatures to enact laws on online skill-based games.

Way forward

  • Censoring: Minors should be allowed to proceed only with the consent of their parents — OTP verification on Aadhaar could resolve this.
  • Awareness: Gaming companies should proactively educate users about potential risks and how to identify likely situations of cheating and abuse.
  • Regulating mechanism: A Gaming Authority in the central government should be created.
  • Accountability of the gaming company: It could be made responsible for the online gaming industry, monitoring its operations, preventing societal issues, suitably classifying games of skill or chance, overseeing consumer protection, and combatting illegality and crime.
  • All-encompassing legislation: the Centre should formulate an overarching regulatory framework for online games of skill. India must move beyond skill-versus-chance debates to keep up with the global gaming industry.

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Economic inequality and the relationship between state, citizens and taxation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Economic inequality In India, Welfare state and the relation between state, citizen and taxation

inequality

Context

  • Economic inequality in India impacts every aspect of our everyday lives, despite the country being a welfare state. As we celebrate 75 years of Independence, the poor citizens of India continue to face increased fiscal burden in the form of inflation and higher taxes, with fewer benefits.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

 “No taxation without representation”

  • This slogan played a crucial role in the freedom movements of India and the United States.
  • The statement indicates the relationship between the state, citizens and taxation.

inequality

Analysis: Relationship between the state, citizens and taxation

  • A concept of welfare state: The legitimacy of taxation is derived from the welfare done by the government.
  • Government’s role: The Constitution of India envisaged the state’s role as a welfare one. For that, the government is empowered to administer taxes and their transfer.
  • However, in the year of Azadi ka Amrit Mahotsav, ‘transfers’ are being painted as revadi (freebies) and the lives of poor citizens are being burdened by regressive “taxes”
  • Inflation as a hidden tax: Inflation acts as a hidden tax on poor and middle-class citizens. For instance, at the time of the introduction of the central scheme Pradhan Mantri Kisan Samman Nidhi or PM-KISAN, which gave Rs 6,000 cash benefit to farmers, diesel cost Rs 65 per litre. Thus, fuel inflation devours the cash benefit of this scheme
  • Highway taxation in contrast with the idea of a welfare state: The roadways are meant to be available free of cost, being public goods. However, Privatisation and PPP models, such services now demand a fee. In the financial year 2021-2022, the government mopped up Rs 35,000 crore as toll tax. The same is projected to reach Rs 1.34 lakh cr by 2025.
  • The diversion of funds meant for one to other sectors is an implicit fiscal burden: The road cess that was intended to fund the construction of roads is diverted to other projects, while citizens are charged heavy tolls for the roads, adding up to already toll burdened people.
  • The case of municipal tax and user charges: When citizens pay municipal tax, the municipality is supposed to ensure cleanliness and sanitation facilities. But the Ahmedabad Municipal Corporation (AMC) introduced a “User Charge” of Rs 365 per household to make the city clean, which is 15% of the municipal tax amount.
  • Discriminatory practices of the administration: Flawed administrative rules also impose fiscal costs on the poor and middle classes of society. Administration allows cars to be parked on the road with impunity, but if two-wheelers are parked on the road, they get towed.

inequality

Criticism: Discriminatory treatment to rich and poor in the name of welfare state

  • Monetisation of public spaces weakens state- citizen relationship: It is said when people take ownership and responsibility of public spaces, people become citizens. It ought to be remembered that monetisation of public spaces portends to weaken the state-citizen relationship.
  • The nomenclature of government language itself reflects discriminatory approach: When governments provide fiscal help to the poor, it is called revadi, but the same offered to the rich is lucratively termed “incentive”.
  • Subsidised food is advertised while incentives provided to corporates are not well known: Posters for subsidised food to the poor are ubiquitous across India, but no public posters are screaming about the Rs 1.97 lakh crore “incentive” given to the corporate sector under 13 production linked incentive schemes.
  • Flawed mechanism of personal details in the name of transparency: In the name of transparency, the government uploads the personal details of each Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) worker on its website; but the same government does not disclose the names of willful bank defaulters to uphold those ideals of privacy.

inequality

Conclusion

  • 73% of the wealth generated in India in 2017 went to the richest 1%, while the poorest half of the population saw only a 1% increase in their wealth. When we celebrate the Azadi Ka Amrit Mahotsav, the need of the hour is to focus must be to make India economically equal and prosperous.

Mains question

Q. As we celebrate 75 years of Independence, the poor citizens of India continue to face increased fiscal burden in the form of inflation and higher taxes, with fewer benefits. Critically examine.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Global Minimum Tax on big businesses

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Global Minimum Tax

Mains level: Not Much

tax

Members of the EU last week agreed in principle to implement a global minimum tax of 15% on big businesses.

Global Minimum Corporate Tax

  • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
  • Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
  • This has allowed companies to avoid paying higher taxes in their traditional home countries.

What is the recent EU agreement?

  • EU members have agreed to implement a minimum tax rate of 15% on big businesses in accordance with Pillar 2 of the global tax agreement framed by the OECD last year.
  • Under the OECD’s plan, governments will be equipped to impose additional taxes in case companies are found to be paying taxes that are considered too low.
  • This is to ensure that big businesses with global operations do not benefit by domiciling themselves in tax havens in order to save on taxes.

Need for a global minimum tax

  • Corporate tax rates across the world have been dropping over the last few decades as a result of competition between governments to spur economic growth through greater private investments.
  • Large multinational companies have traditionally paid taxes in their home countries even though they did most of their business in foreign countries.
  • The OECD plan tries to give more taxing rights to the governments of countries where large businesses conduct a substantial amount of their business.
  • As a result, large US tech companies may have to pay more taxes to the governments of developing countries.

History of such taxes

  • Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020.
  • The global tax competition was kick-started by former US President Ronald Reagan and former British PM Margaret Thatcher in the 1980s.
  • The OECD’s tax plan tries to put an end to this “race to the bottom” which has made it harder for governments to shore up the revenues required to fund their rising spending budgets.
  • The minimum tax proposal is particularly relevant at a time when the fiscal state of governments across the world has deteriorated as seen in the worsening of public debt metrics.

Response to the EU move

  • Some governments, particularly those of traditional tax havens, are likely to disagree and stall the implementation of the OECD’s tax plan.
  • High tax jurisdictions like the EU are more likely to fully adopt the minimum tax plan as it saves them from having to compete against low tax jurisdictions.
  • Low tax jurisdictions, on the other hand, are likely to resist the OECD’s plan unless they are compensated sufficiently in other ways.

Way forward

  • Supporters of the OECD’s tax plan believe that it will end the global “race to the bottom” and help governments collect the revenues required for social spending.
  • The plan will also help counter rising global inequality by making it tougher for large businesses to pay low taxes by availing the services of tax havens.
  • Critics of the OECD’s proposal, however, see the global minimum tax as a threat.
  • They argue that without tax competition between governments, the world would be taxed a lot more than it is today, thus adversely affecting global economic growth.
  • In other words, these critics believe that it is the threat of tax competition that keeps a check on governments that would otherwise tax their citizens heavily to fund profligate spending programs.

 

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Rationalization in long-term Capital Gains Tax structure on the anvil

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Capital Gains Tax

Mains level: Not Much

The Finance Ministry is looking at rationalizing long-term capital gains tax structure by bringing parity between similar asset classes and revising the base year for computing indexation benefits.

What is Capital Gains Tax?

  • Capital gains tax is levied on the profits made on investments (Base Year: 2001).
  • It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
  • Under the Income Tax Act, gains from sale of capital assets — both movable and immovable — are subject to ‘capital gains tax’.

Types of CGT

(A) STCG (Short-term capital asset)

  • An asset held for a period of 36 months or less is a short-term capital asset.
  • The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18.
  • For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017.
  • The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

  1. Equity or preference shares in a company listed on a recognized stock exchange in India
  2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
  3. Units of UTI, whether quoted or not
  4. Units of equity oriented mutual fund, whether quoted or not
  5. Zero coupon bonds, whether quoted or not

(B)  LTCG (Long-term capital asset )

  • An asset held for more than 36 months is a long-term capital asset.
  • They will be classified as a long-term capital asset if held for more than 36 months as earlier.
  • Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

  1. Equity or preference shares in a company listed on a recognized stock exchange in India
  2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
  3. Units of UTI, whether quoted or not
  4. Units of equity oriented mutual fund, whether quoted or not
  5. Zero coupon bonds, whether quoted or not

Why is it so complicated?

Capital gains tax is complicated for a few primary reasons.

  • First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
  • Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
  • Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

Stipulated reforms by Finance Ministry

  • Currently, shares held for more than one year attract a 10% tax on long-term capital gains.
  • Gains arising from sale of immovable property and unlisted shares held for more than 2 years and debt instruments and jewellery held for over 3 years attract 20% long-term capital gains tax.
  • Also, a change in base year for computing inflation-adjusted capital gains is being contemplated.
  • The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.
  • Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

What are Gift Taxes?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gift Tax

Mains level: NA

The Supreme Court recently ruled that shares within the lock-in period are not ‘quoted shares’, and thus they need to be valued as ‘unquoted shares’ to determine the gift tax liability.

What are quoted and unquoted shares?

  • According to the Wealth Tax Act, ‘quoted share’ in relation to an equity share or a preference share means a share quoted on any recognised stock exchange with regularity from time to time.
  • The quotations of such shares are based on current transactions made in the ordinary course of business.
  • An ‘unquoted share’ is simply a share that is not a quoted share.
  • So according to the SC order, if the locked-in shares of the promoter falls in the ‘unquoted share’ category, their price treatment can’t be that of the ‘quoted shares’, and so gift tax will not be applicable.

What are Gift Taxes?

  • Gift tax is a provision introduced by the Parliament of India in 1958.
  • It was introduced to impose tax on giving and receiving gifts under certain circumstances which is specified under the act.
  • These gifts can be in any form including cash, jewellery, property, shares, vehicle, etc.

Gift Tax on Transfers

  • The gift tax is also applicable on certain transfers that is not considered as a gift.
  • The transfer of existing movable or immovable property in money or money’s worth qualifies for gift tax.

Certain exemptions

  • Though gift tax is applicable on gifts whose value exceeds Rs.50,000, the gift is exempted from tax if it was given by a relative.
  • The income tax rule specifies who can be considered as a relative and the list is mentioned below.
  1. Parent
  2. Spouse
  3. Siblings
  4. Spouse’s siblings
  5. Lineal descendants
  6. Lineal descendants of the spouse

Listed below are other situations in which the gift will be exempted from tax.

  1. Gifts received during weddings are usually exempted from tax.
  2. Gifts received as part of inheritance is exempted from tax.
  3. Cash or rewards received by local authorities or educational institutions on the basis of merit is exempted from tax.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

India’s tax-GDP ratio may be too high

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax buoyancy

Mains level: Paper 3- Tax-to-GDP ratio

Context

What the data conclusively show is that the debate on the Indian economy should shift away from simplistic notions (borrowed from the West?) of the tax-GDP ratio being low in India.

India’s low tax-to-GDP ratio

  • One of the stylised beliefs in India, and amongst some leading economic commentators both in India and abroad, is that our tax/GDP ratio is lower than what it “should” be.
  • This low tax-to-GDP ratio is blamed for a lower rate of investment, a higher fiscal deficit, and lower GDP growth — and all because the tax ratio is too low.
  • There can be reasonable doubts about the presumed links.
  • There are three important fiscal variables in the economy — taxes, fiscal deficit, and debt.
  • They are inter-related — lower tax revenue means higher fiscal deficit, for the same level of expenditures, and higher deficit means higher debt.
  • All three, directly or indirectly, are assumed to affect growth and/or inflation.

Analysing India’s tax-to-GDP ratio

  • Two common observations on tax-to-GDP for India — first, it is low at around 10-11 per cent of GDP and it has stayed at close to that level for the last 20 years.
  • In 2019, it hit a decade low of 10 per cent of GDP, the same as in 2014.
  • Second, in comparison with our peers, it is much lower.
  • Hence, logic dictates that we should strive to increase it.
  • But which country should we compare India with?

Issues with comparing tax-to-GDP with other countries

  • A common observation is to look at the tax-GDP ratio in G20 countries.
  • Function of average level of per capita income: This is the beginning of a set of misinterpretations committed either knowingly, or unknowingly.
  • Because simple logic dictates that tax collected is a function of the average level of per capita income.
  • Per capita income in the G20 varies from around $2,100 (India) to around $65,000 (US).
  • The 10-11 per cent figure for India is the tax/GDP ratio for taxes administered at the central level.
  • Challenges in data collection: Taxes in India, as in many other large, especially federal, countries, are collected at both a federal and state level.
  • And many economies have local (municipal) taxes as well. The tax collected is the sum of all these taxes.
  • Until now, collecting such disaggregated data for a large set of countries was challenging.
  • However, in a recent web publication, the IMF on their World Revenue Longitudinal Data set has published such data for all countries, from 1990-2019.
  • In this pre-pandemic year, among G20 economies, India’s tax-GDP (Xtax) ratio of 16.7 per cent was higher than that of China (15.9 per cent), Mexico (14.1 per cent), Indonesia (11.0 per cent), Saudi Arabia (5.9 per cent) and Turkey (15.9 per cent).
  • A more informative indicator of whether a country is taxing too much or too little in comparison with others is to look at the tax-GDP ratio adjusted for PPP per capita income.
  • Prediction via a simple regression of tax-to-GDP on log PPP per capita GDP can yield one estimate of the tax gap — the difference between actual and actual adjusted for level of income.
  • The world average tax gap is -1.3 per cent; India is +1.2 per cent for the nine years 2011-2019.
  • So, India’s tax GDP ratio averages 2.5 percentage points more than an average economy.
  • For every year for which data are available 1990-2019, India has had a positive tax gap — there is little evidence that a higher tax/GDP ratio helps growth.

How corporate tax cut helped India

  • Corporate tax cut 2019: For years, the advocacy in India was to increase revenue from corporate tax which is one of three major components of tax revenue, the other being income and indirect taxes.
  • In September 2019, Finance Minister going well against Indian established conventional wisdom, lowered the corporate tax rate by around 10 percentage points.
  • Avoiding triple whammy: Opponents said that empirical evidence around the world (for example, the US) meant that if tax rates were lowered, revenues would decline, the fisc would increase, as would inequality.
  • A triple whammy that is best avoided.
  • However, now, three years later, we can assess the efficacy (or not) of this bold experiment.
  • For the three months April-June 2022, corporate tax revenues, y-o-y, are up 30 per cent.
  • Using fiscal 2019-20 as a base, corporate tax revenue has increased by 66 per cent, GDP by 33 per cent — an average tax buoyancy of 2.0 over three years.
  • The previous largest tax buoyancy was in 2006-7 when the world was buoyant.
  • Tentatively, the tax-GDP ratio in the fiscal year 2022-23 will average over 18 per cent in India, a level close to Japan and the US.

Conclusion

In India, the debate should shift to expenditures, and quality of expenditures (and perhaps to reform of the direct tax code). In this regard, suggestion that freebies be critically examined is most timely and welcome.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)


 Back2Basics: Tax buoyancy and tax elasticity

  • Tax buoyancy: The buoyancy of a tax system measures the total response of tax revenue both to changes innational income and to discretionary changes in tax policies over time, and it is traditionally interpreted as the percentage change in revenue associated to a one percent change in income.
  • Tax elasticity: It refers to changes in tax revenue in response to changes in tax rate.
  • For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Centre raises thresholds for prosecution under Customs Act

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Custom Duty

Mains level: Customs frauds

The government has raised the thresholds for prosecutions and arrests under the Customs Act to ₹50 lakh from ₹20 lakh for smuggling and illegal imports of goods in baggage, and from ₹1 crore to ₹2 crore for cases involving commercial fraud.

What is Custom Duty?

  • Customs duty refers to the tax imposed on goods when they are transported across international borders.
  • In simple terms, it is the tax that is levied on import and export of goods.
  • Custom duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
  • The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods.
  • The rate of Customs duty varies depending on where the goods were made and what they were made of.

Types of custom duty

  • Basic Customs Duty (BCD): It is the duty imposed on the value of the goods at a specific rate at a specified rate of ad-valorem basis.
  • Countervailing Duty (CVD): It is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India.
  • Additional Customs Duty or Special CVD: It is imposed to bring imports on an equal track with the goods produced or manufactured in India.
  • Protective Duty: To protect interests of Indian industry
  • Safeguard Duty: It is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.
  • Anti-dumping Duty: Manufacturers from abroad may export goods at very low prices compared to prices in the domestic market. In order to avoid such dumping, ADD is levied.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Hotels cannot force customers to pay Service Charge: Centre

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Unfair practices against consumer rights

The Central Consumer Protection Authority (CCPA) issued guidelines asking hotels and restaurants not to collect service charge from customers.

We often get to hear in news. Once a person had used a loo at a hotel in our national capital. She was charged ₹499 as a service charge in return of purchasing a water bottle!

What is the news?

  • Under the guidelines, consumers can lodge complaints against hotels and restaurants by calling the number 1915.
  • The CCPA has issued guidelines under Section 18 (2) (I) of The Consumer Protection Act, 2019.
  • The CCPA was established in July 2020 to promote, protect, and enforce the rights of consumers as a class, and to investigate, prosecute, and punish violators.

What are the guidelines?

  • The CCPA has issued five major guidelines regarding the levy of service charge by restaurants and hotels, which has for long been a contentious issue and has periodically triggered complaints from consumers.
  • The guidelines say:
  1. No hotel or restaurant shall add service charge automatically or by default in the bill;
  2. Service charge shall not be collected from consumers by any other name;
  3. No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional, and at the consumer’s discretion;
  4. No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers; and
  5. Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

What can a consumer do in case of a violation of these guidelines?

  • The consumer has four options at different levels of escalation in case she spots the levy of service charge in her bill.
  • First, she can make a request to the hotel or restaurant to remove the service charge from her bill.
  • Second, she can lodge a complaint on the National Consumer Helpline (NCH), which works as an alternative dispute redressal mechanism at the pre-litigation level.
  • The complaint can be lodged by making a call on the number 1915, or on the NCH mobile app.
  • Third, the consumer can complain to the Consumer Commission, or through the edaakhil portal, http://www.edaakhil.nic.in.
  • Fourth, she can submit a complaint to the District Collector of the concerned district for investigation and subsequent proceedings by the CCPA.
  • A consumer can complain directly to the CCPA by sending an e-mail.

What are the components of a food bill?

  • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
  • This is for all kinds of standalone restaurants.
  • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

Nature of Service charge

  • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
  • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
  • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

What do the restaurants say?

  • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
  • There is no illegality in levying such a charge.
  • Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.
  • GST is also paid on the said charge to the Government.

Where does the fund go?

  • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
  • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
  • Of course, they are paid the salaries but the service charge works as an incentive for them.
  • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
  • A service charge ensures all staff members are rewarded evenly.

What is the issue then?

  • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
  • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
  • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
  • Also, there is no transparency as to where this charge goes.
  • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

Problems faced by customers

  • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
  • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Digital Service Tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Pillar One

Mains level: Paper 3- OECD formula for digital tax and its implications for India

Context

Over the past four years, 137 countries have engaged intensively with the OECD to find a solution to the tax challenges arising from digitalisation. Like any international agreement, finding a middle ground has been difficult and a series of compromises have been made.

What makes it difficult to tax the digital economy?

  • Operation across the border: The unique feature of the digital economy is that firms can operate seamlessly across borders and users and their data contribute to their profits.
  • However, this made it harder to tax such an economy.
  • It was not clear how profits were to be pinned down to any jurisdiction.
  • Political issues: Taxing digital economy became a political issue because the largest technology firms are tax residents of developed countries and redefining digital presence as the basis of taxation would potentially allow large markets like India more right to tax.
  • Developing vs. developed countries: Developing countries wanted that profits from digital operations should be fractionally apportioned to markets while developed countries believe that a fraction of residual profit, mainly arising from marketing functions, should be taxed in markets.

 Equalisation levy and DST issue

  • The divergence in developed and developing countries as explained above compelled countries to implement unilateral measures.
  • India was the first country to implement a gross equalisation levy on turnover.
  • This is not covered by tax treaties.
  • So, while the income tax act does not apply to the levy, credit is available for the tax paid by the company in its home country.
  • Similarly, several other countries have announced or implemented a digital services tax (DST).
  • In 2021, India expanded the scope of the equalisation levy.
  • The US initiated the US Trade Representative investigations which found DST to be discriminatory, and then announced retaliatory tariffs.

Two-pillar approach and issues with its adoption

  • The DSTs encouraged the US to actively participate in finding a consensus-based solution.
  • As talks progressed, the OECD announced that the issue of allocation of taxing rights would be actively considered and adopted a two-pillar approach.
  • Pillar One approach: The first pillar was to define the rules for taxing digital companies.
  • Sovereignty issue: Pillar One was to go beyond digital companies and apply to large companies with annual revenue over € 20 billion. To ensure certainty to taxpayers, the solution will require excessive global coordination.
  • Whether this will undermine sovereignty, remains to be seen.
  • Therefore, it is important to consider if the consensus approach is worth pursuing.
  • EL may still apply to companies not covered by OECD proposal: In fact, the EL may apply to companies that are not covered by the OECD proposal, leaving one to wonder whether it will truly address the tax challenges from digitalisation. 
  • Complications: Corporations that argue in favour of simplicity must also consider the potential benefits from an EL like tax that sets aside the complications of attributing profits to complex functions.
  • The OECD approach creates a fiction of reallocation, where the profits reallocated through Pillar One could in fact be compensated for by taxing back global profits taxed below 15 per cent.

Conclusion

As per Pillar One proposal, DSTs will be removed once the OECD approach is ratified in 2023. It is imperative therefore that countries assess the price of compromise.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Taxing cryptocurrency transactions

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Taxing cryptocurrencies

Context

Notwithstanding the eventual introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill in Parliament, cryptocurrencies continue to proliferate.

Provisions in Income Tax Act 1961 to tax cryptocurrencies

  • Cryptocurrencies not mentioned in Income Tax Act, 1961: Although the Income Tax Act, 1961 (“IT Act”) does not specifically mention cryptocurrencies, it does cast a wide enough net to bring crypto transactions under its ambit.
  • Capital asset: Trading in cryptocurrency may be classified as transfer of a ‘capital asset’, taxable under the head ‘capital gains.
  • Business income: If such cryptocurrencies are held as stock-in trade and the taxpayer is trading in them frequently, the same will attract tax under the head ‘business income’.
  • Even if one argues that crypto transactions do not fall under the above heads, Section 56 of the IT Act shall come into play, making them taxable under the head ‘Other sources of income’.

Challenges in taxing cryptocurrencies

  • The above provisions in themselves are not sufficient in order to put in place a simple yet effective taxation regime for cryptocurrencies.

[1] Varied interpretations:

  • First, the absence of explicit tax provisions has led to uncertainty and varied interpretations being adopted in relation to mode of computation, applicable tax head and tax rates, loss and carry forward, etc.
  • For instance, the head of income under which trading of self generated cryptocurrency (currencies which are created by mining, acquired by air drop, etc.) is to be taxed is unclear.
  • Since there is no consistency in the rates provided by the crypto-exchanges, it is difficult to arrive at a fair market value.
  • Similarly, when a person receives cryptocurrency as payment for rendering goods or services, how should one arrive at the value of the said currency and how should such a transaction be taxed?

[2] Identifying tax jurisdiction

  • It is often tricky to identify the tax jurisdiction for crypto transactions as taxpayers may have engaged in multiple transfers across various countries and the cryptocurrencies may have been stored in online wallets, on servers outside India.

[3] The anonymity of taxpayer

  • The identities of taxpayers who transact with cryptocurrencies remain anonymous.
  • Exploiting this, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.

[4] Lack of third party information on crypto transaction

  • The lack of third party information on crypto transactions makes it difficult to scrutinise and identify instances of tax evasion.
  • One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks.
  • However, crypto-market intermediaries like the exchanges, wallet providers, network operators, miners, administrators are unregulated and collecting information from them is very difficult.

[5]  Physical goods/services may change hand in return for cryptocurrencies

  • Even if the crypto-market intermediaries are regulated and follow Know Your Customer (KYC) norms, there remains a scenario, where physical cash or other goods/services may change hands in return for cryptocurrencies.
  • Such transactions are hard to trace and only voluntary disclosures from the parties involved or a search/survey operation may reveal the tax evaders.

Steps need to be taken

  • Statutory provision: The income-tax laws pertaining to the crypto transactions need to be made clear by incorporating detailed statutory provisions.
  • Awareness generation: This should be followed by extensive awareness generation among the taxpayers regarding the same.
  • Separate mandatory disclosure: The practice of having separate mandatory disclosure requirements in tax returns (as is the case in the United States) should be placed on the taxpayers as well as all the intermediaries involved, so that crypto transactions do not go unreported.
  • Strengthen international legal framework: Additionally, the existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto-transactions.
  • This will go a long way in linking the digital profiles of cryptocurrency holders with their real identities.
  • Training tax officers: the Government must impart training to its officers in blockchain technology.
  • The United Nations Office on Drugs and Crime’s ‘Cybercrime and Anti-Money Laundering’ Section (UNODC CMLS) has developed a unique cryptocurrency training module, which can aid in equipping tax officers with requisite understanding of the underlying technologies.

Consider the question “What are the provision in Income Tax Act 1961 to tax the cryptocurrencies? What are the challenges in taxing cryptocurrencies? “

Conclusion

It is certain that cryptocurrencies are here to stay. A streamlined tax regime will be essential in the formulation of a clear, constructive and adaptive regulatory environment for cryptocurrencies.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Why India’s pro-rich, anti-poor taxation policies must change

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Issues with India's taxation policies

Context

To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

Growing inequality in India

  • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
  •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
  • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
  • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
  •  According to Crédit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
  • The average wealth of these millionaires has increased by 74 per cent over this period.

Issues with taxation policies

  • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
  • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
  • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
  • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

Impact of pro-rich taxation policy

  • Deprives the state of resources: This taxation policy deprived the state of important resources.
  • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
  • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
  • Taxes on petroleum products are a case in point.

High taxes on petroleum products

  • About two-thirds of the cost of a litre of petrol now goes towards taxes.
  • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
  • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
  • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
  • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”

Conclusion

The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Explained: Global Minimum Tax Deal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Global Minimum Tax, BEPS

Mains level: Global Minimum Tax Debate

A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries.

What is the news?

  • The OECD said four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had not yet joined the agreement.
  • However, the countries behind the accord together accounted for over 90% of the global economy.

Why a global minimum tax?

  • With budgets strained after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to low-tax countries.
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions.
  • This has allowed companies to avoid paying higher taxes in their traditional home countries.
  • The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.

How would a deal work?

  • The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally.
  • Govts could still set whatever local corporate tax rate they want.
  • However, buif companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
  • A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

What happens next?

  • The next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at an end October summit.
  • Nonetheless, questions remain about the US position which hangs in part on a domestic tax reform the Biden administration wants to push through the US Congress.
  • The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023, an extremely tight timeframe given that previous international tax deals took years to implement.
  • Countries that have in recent years created national digital services taxes will have to repeal them.

What will be the economic impact?

  • The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
  • Taxing rights on more than $125 billion of profit will be additionally shifted to the countries were they are earned from the low tax countries where they are currently booked.
  • Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
  • However, various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.

Back2Basics: Base Erosion and Profit Shifting (BEPS)

  • BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
  • It thus “erodes” the “tax base” of the higher-tax jurisdictions.
  • Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
  • It is alleged that BEPS is associated mostly with American technology and life science multinationals.

Try this:

 

Q.3) What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India? (10 Marks)

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Taxing interest on Provident Fund

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Provident Fund

Mains level: Need for taxing PF

Following its Budget announcement in February, the Finance Ministry has now notified the rules for taxing interest income on contributions made to the Employees’ Provident Fund (EPF) beyond Rs 2.5 lakh (for private-sector employees) and Rs 5 lakh (for government sector employees).

What is Provident Fund?

  • Provident Fund is a government-managed retirement savings scheme for employees, who can contribute a part of their savings towards their pension fund, every month.
  • These monthly savings get accumulated every month and can be accessed as a lump sum amount at the time of retirement, or end of employment.
  • Since the provident fund money consists of a large chunk of savings, it can be used to grow your retirement corpus easily.

Types of provident funds

There are mainly three different types of PFs, which are as follows:

  1. General provident fund: It is a type of PF which is maintained by governmental bodies, including local authorities, the Railways, and other such bodies. Thus, these types of PFs are mainly defined by government bodies.
  2. Recognized provident fund: It is the one that applies to all privately-owned organizations that contain more than 20 employees. Moreover, holding a rightful claim to the PF associated with your organization, you will be given a UAN or Universal Account Number. This enables you to transfer your PF funds from one employer to another whenever you move from one occupation to another.
  3. Public provident fund: It is defined by the voluntary nature of investment on the part of the employee. The PPF is also associated with a minimum deposit of Rs. 50 and a maximum amount of Rs. 1.5 lakhs. The PPF has a lock-in period of 15 years.

What is the tax on EPF contributions?

  • In February, the Budget proposed that tax exemption will not be available on interest income on PF contributions exceeding Rs 2.5 lakh in a year.
  • Although this has been a concern for salaried individuals contributing to EPF, it will impact only those who contribute more than Rs 2.5 lakh in a year.
  • It will not affect their existing corpus or the aggregate annual interest on that.
  • In March, the government proposed to double the cap on contribution from Rs 2.5 lakh to Rs 5 lakh for tax-exempt interest income where there is no contribution by the employer.
  • With this, the government provided relief for contributions made to the General Provident Fund that is available only to government employees and there is no contribution by the employer.

Why tax the PF?

  • There have been instances where some employees are contributing huge amounts to these funds and are getting the benefit of tax exemption at all stages — contribution, interest accumulation, and withdrawal.
  • With an aim to exclude high net-worth individuals (HNIs) from the benefit of high tax-free interest income on their large contributions, the government has proposed to impose a threshold limit for tax exemption.
  • This will be applicable for all contributions beginning April 1, 2021.

How will it get taxed?

  • For an individual in the higher tax bracket of 30%, the interest income on contribution above Rs 2.5 lakh would get taxed at the same marginal tax rate.
  • What this means is that if an individual contributes Rs 3 lakh every year to the provident fund (including the voluntary PF contribution) then the interest on his contribution above Rs 2.5 lakh —that is, Rs 50,000 — will be taxed.
  • So, the interest income of Rs 4,250 (8.5% on Rs 50,000) will be taxed at the marginal rate. If the individual falls in the 30% tax bracket, he/ she will have to pay a tax of Rs 1,325.
  • For an individual contributing Rs 12 lakh in a year, the tax will be applicable on interest income on Rs 9.5 lakh (Rs 12 lakh minus Rs 2.5 lakh). In this case, the tax liability would amount to Rs 25,200.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

What is the Sovereign Right to Taxation?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Taxation powers in India

Mains level: Retrospective taxation

Scrapping the retrospective levy is believed to provide clarity to investors by removing a major source of ambiguity on taxation laws, the government has stressed the need to establish its “sovereign right to taxation”.

Defining a Tax

  • A document on the Ministry of Statistics and Programme Implementation website quotes the definition of tax as a “pecuniary burden laid upon individuals or property owners to support the government; a payment exacted by legislative authority”.
  • It states that a tax “is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority”.

The ‘sovereign right to taxation’

  • In India, the Constitution gives the government the right to levy taxes on individuals and organizations but makes it clear that no one has the right to levy or charge taxes except by the authority of law.
  • Any tax being charged has to be backed by a law passed by the legislature or Parliament.

Taxation in India

  • Taxes in India come under a three-tier system based on the Central, State, and local governments and the Seventh Schedule of the Constitution puts separate heads of taxation under the Union and State list.
  • There is no separate head under the Concurrent list, meaning Union and the States have no concurrent power of taxation, as per the document.

Back2Basics:

Taxation in India: Classification, Types, Direct tax, Indirect tax

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

The sovereign right to tax is not absolute

Note4Students

From UPSC perspective, the following things are important :

Prelims level: ISDS

Mains level: Paper 3- Issue of retrospective taxation

Context

A bill introduced in Parliament last week aims to nullify the 2012 amendment in the Income Tax Act which made the income tax law retroactively applicable on indirect transfer of Indian assets.

Issue of taxation as a sovereign right of the state

  • Several  Investor-State Dispute Settlement (ISDS) tribunals have recognised the fundamental principle that taxation is an intrinsic element of the state’s sovereign power. 
  • The ISDS tribunals have also held that whenever a foreign investor challenges states’ taxation measures, there is a presumption that the taxation measures are valid and legal.
  • For instance, an ISDS tribunal in Renta 4 v. Russia said that when it comes to examining taxation measures for BIT breaches, the starting point should be that the taxation measures are a bona fide exercise of the state’s public powers.

What are the limits on the taxation rights of a Country under BITs

  • The two most used BIT provisions to challenge a state’s taxation measures are expropriation and the fair and equitable treatment provision.
  • 1) Expropriation: In the context of expropriation, one of the key ISDS cases that explained the limits on the state’s right to tax is Burlington v. Ecuador.
  • In this case, the tribunal held that under customary international law, there are two limits on the state’s right to tax.
  • First, the tax should not be discriminatory.
  • Second, it should not be confiscatory.
  • 2) Fair and equitable treatment: In the context of the fair and equitable treatment provision, foreign investors have often challenged taxation measures as breaching legal certainty, which is an element of the fair and equitable treatment provision.
  • Although legal certainty does not mean immutability of legal framework, states are under an obligation to carry out legal changes such as amending their tax laws in a reasonable and proportionate manner.

So, what happened in Cairn Energy v. India case?

  • The tribunal in Cairn Energy v. India said that taxing indirect transfers is India’s sovereign power and the tribunal would not comment on it.
  • Legal certainty: The tribunal said that India’s right to tax in the public interest should be balanced with the investor’s interest of legal certainty.
  • The tribunal held that the public purpose that justifies the application of law prospectively will usually be insufficient to justify the retroactive application of the law.
  • India argued that the 2012 amendment was to ensure that foreign corporations who use tax havens for the indirect transfers of underlying Indian assets pay taxes.
  • However, the tribunal held that this objective could be achieved by amending the income tax law prospectively, not retroactively.
  • The tribunal did not rule against retroactivity of tax laws per se but against the retroactive application that lacked public policy justification.

Way forward

  • Carving out taxation from BITs: India in its 2016 Model BIT carved out taxation measures completely from the scope of the investment treaty.
  • Nonetheless, carving out taxation measures from the scope of the BIT does not mean that states are free to do as they please.
  • India should exercise its right to regulate while being mindful of its international law obligations, acting in good faith and in a proportionate manner.
  • ISDS tribunals do not interfere with such regulatory measures.

Conclusion

In sum, the debate never was whether India has a sovereign right to tax, but whether this sovereign right is subject to certain limitations. The answer is an emphatic ‘yes’ because under international law the sovereign right to tax is not absolute.


Back2Basics:  Investor-State Dispute Settlement (ISDS) tribunal

  • ISDS is a mechanism included in many trade and investment agreements to settle disputes.
  • Settling these investor disputes relies on arbitration rather than public courts.
  • Under agreements which include ISDS mechanisms, a company from one signatory state investing in another signatory state can argue that new laws or regulations could negatively affect its expected profits or investment potential, and seek compensation in a binding arbitration tribunal.
  • The system only provides for foreign companies to sue states, not the other way around.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Taxation Laws (Amendment) Bill

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Issue of retrospective taxation

Context

With the government proposing to repeal the ‘retrospective tax’ amendment introduced in the Union Budget 2012-13, a 14-year-story has come to an end.

Background of retrospective tax

  • In 2007 Vodafone acquired Hutchison Essar, the telecom company, for $11 billion. But the deal did not take place in India.
  • Yet, Vodafone was slapped with a huge income tax demand in India.
  • The Supreme Court rule in favour of Vodafone and said that the Indian authorities could not tax a deal executed in Cayman Islands.
  • This verdict led to the 2012 amendment in the Income Tax Act, to the effect that if an Indian asset was held by a foreign company and an acquirer bought this holding company, such a transaction was deemed to be taxable in India because the underlying asset was located in India.
  • More importantly, this change was made retrospectively from 1962.
  • Now, the government has introduced The Taxation Laws (Amendment) Bill, 2021 to undo this insidious provision from the Finance Bill, 2012.
  • The government will not raise tax demands in any such case if the transaction occurred before 28 May 2012.
  • The tax on the indirect sale of assets located in India still stays on the statute books, but it is fully visible to and understood by any parties looking to enter into such a transaction.

Why repeal of retrospective taxation is a good move?

  • Resolution of case the cases: This will potentially help resolve 17 cases in which income tax demand had been raised, including two high profile cases—Cairn and Vodafone.
  • Visibility and stability: The government is putting to rest the concept of retrospective taxation and is also creating visibility and stability for the future.
  • Predictability: The most important aspect of any tax regime is its predictability and this decision helps bring that.
  • Honouring the rule of law: It also reiterates India’s commitment to honour the rule of law and treaties.
  • Build confidence: Apart from the various reform measures and incentives being offered, the sanctity of contracts is a key factor that any investing entity will look at when deciding on expanding business operations in India.
  • The government’s move would help build confidence and provide a fillip to Atmanirbhar Bharat.

Conclusion

As the post-covid recovery picks up, focus needs to be on the future rather than keeping a sword of uncertainty for the past dangling on potential investors. Such a decision needs political capital and ownership, which comes through strongly in this case.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Centre moves to redact Retrospective Tax Law

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Retrospective taxation

Mains level: Cairn Issue

The government took the first step towards doing away with the contentious retrospective tax law of 2012, which was used to raise large tax demands on foreign investors like Vodafone and Cairn Energy.

Retrospective Tax Law: A backgrounder

  • The roots of this law date back to 2007, when Vodafone bought over a majority stake in the telecom operations of Hutch in India for $11.1 billion.
  • While the deal involved the changing of hands of Indian operations of Hutch, the companies party to it were registered outside India and all the paperwork and financial transactions, too, were done outside the country.
  • But the Indian government ruled that Vodafone was liable to pay capital gains tax to it as the deal involved the transfer of assets located in India.
  • Importantly, there was no rule in the Indian statutes then that allowed such taxation.
  • Vodafone challenged this claim and the case went to Supreme Court, which ruled in 2012 that there was no tax liability on Vodafone’s part to Indian authorities.

What was the law made then?

  • In 2012, Parliament amended the Finance Act to enable the taxman to impose tax claims retrospectively for deals executed after 1962 which involved the transfer of shares in a foreign entity whose assets were located in India.
  • The target, of course, was the Vodafone deal. Very soon, tax claims were also raised on Cairn Energy.

How did the Companies react?

  • The changes to the Finance Act allowed India to reimpose its tax demand on Vodafone.
  • Tax authorities had slapped a tax bill of Rs 7,990 crore on Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.
  • By 2016, reports say, the bill had risen to Rs 22,100 crore after adding interest and penalty.
  • The demand on Cairn was for Rs 10,247 crore in back taxes over its move, beginning in 2006, to bring its Indian assets under a single holding company called Cairn India Ltd.
  • A few years later, when Cairn India Ltd floated an IPO to divest about 30 per cent of its ownership of the company, mining conglomerate Vedanta picked up most of the shares.
  • However, Cairn UK was not allowed to transfer its stakes as Indian officials held that the company had to first clear the tax liability.

Note: This story is of no use to aspirants. But one must understand how such cases create regression for the Indian economy in the long run.

A case in the Hague

  • That prompted Cairn UK to move the Permanent Court of Arbitration to The Hague, Netherlands.
  • It said that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it.
  • The treaty provides protection against arbitrary decisions by laying down that India would treat investment from the UK in a “fair and equitable” manner.
  • Vodafone, too, had sought arbitration before the Permanent Court of Arbitration, citing the “fair and equitable” treatment clause in the India-Netherlands BIT.

India’s response

  • In September last year, the Hague court ruled in favour of Vodafone, quashing India’s tax claim after holding that it violated the “equitable and fair treatment standard” under the bilateral investment treaty.
  • India refused to pay the compensation, Cairn launched recovery proceedings across countries as part of which a French court ordered the freezing of some Indian assets in Paris.
  • This move discourages foreign investors from coming to India and that the Centre should look to resolve the case at the earliest.
  • The amendments now mooted are designed to do just that.

Taxation Laws (Amendment) Bill, 2021

  • The Bill offers to drop tax claims against companies on deals before May 2012 that involve the indirect transfer of Indian assets would be “on fulfilment of specified conditions”.

Various conditions:

  • The condition includes the withdrawal of pending litigation and the assurance that no claim for damages would be filed.
  • As per the proposed changes, any tax demand made on transactions that took place before May 2012 shall be dropped, and any taxes already collected shall be repaid, albeit without interest.
  • To be eligible, the concerned taxpayers would have to drop all pending cases against the government and promise not to make any demands for damages or costs.

Why is the amendment necessary?

  • The retrospective taxation was termed “tax terrorism”.
  • It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination.
  • This could help restore India’s reputation as a fair and predictable regime apart from helping put an end to taxation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Why India must bargain hard on G7 tax reforms

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Equalisation levy

Mains level: Paper 3- Global minimum tax and issues involve

The article deals with the issue of global minimum tax and how it matters to India in the changing digital landscape where data is the new oil.

Two pillars of global taxation reforms endorsed

  • In the just-concluded G7 summit in the UK, the leaders endorsed the global taxation reforms premised on two pillars.
  • One, that the multinational companies with at least a 10 per cent profit margin pay tax in countries where they operate and that would be 20 per cent of any profit above the 10 per cent margin.
  • Two, a global minimum tax rate that envisages that multinational companies pay a tax of at least 15 per cent in each country they operate.

How companies monetise data

  • The concept of tax on electronic transmission of data across borders was expressly prohibited under multiple WTO declarations.
  • However, in the changed digital landscape, multinational corporations are mining big data, which has economic value, but not paying their fair share of taxes.
  •  Many of these tech firms provide their product for free to users, and based on user engagements, create a detailed profile of the user that would be used to sell ad space to the clients.

Efforts to find solution to tax avoidance

  • The Union government had rightly introduced an equalisation levy at 2 per cent, targeted at non-resident e-commerce operators with a turnover greater than Rs 2 crore in the Union budget of 2020.
  • India had an equalisation levy since 2016, initially at 6 per cent on specified services like online advertisement or provision of digital advertising space and was levied on non-resident firms, deducted by the payer.
  • In the case of the amended equalisation levy, the responsibility lay with the operator and was applicable to earnings that have been made by selling advertisements based on the data collected within the country.
  • The member-states of the OECD have been trying to find a solution to tax avoidance by multinational corporations under the Base Erosion and Profit Shifting Project since 2015.
  • OECD had built a model around two pillars on which the G7 position has been announced.

Way forward for India

  • India has to stand its ground.
  • With the largest user base for Facebook, WhatsApp and YouTube, India will not be adequately compensated by the above two steps in global minimum tax.
  • The government must also pass the Personal Data Protection Bill 2019 quickly so that provisions for data localisation, requiring Indian data to be stored and processed in the country are in place.
  •  This could be the ideal way to force tech firms to correctly evaluate the revenue generated from our sovereign data and thus tax it.

Consider the question “As the world moves towards the global taxation reforms, what are the factors India needs to consider? Also, mention the previous efforts made to find the solution to tax avoidance by the multinational companies.”

Conclusion

India must negotiate hard to come to an equitable position on the global tax and avoid as it harbours the largest user base of the social media companies.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Global minimum tax may help India but can cause international disagreements

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Global Minimum corporate tax and issues associated with it

The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.

The US proposal for global minimum tax

  • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
  • The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
  • The U.S. is now discussing a floor of 15% for the minimum tax rate.
  • The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.

Similarity with Pillar Two Proposal

  • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
  • It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
  • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
  • India has been part of the Pillar Two discussions and has not objected in principle to the proposal.

How Global Minimum Tax would benefit India?

  • The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
  • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
  • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
  • Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
  • Revenue from such operations is often retained offshore and not repatriated to India.
  • Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
  • Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.

Challenges

  • Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
  • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
  • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.

Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?” 

Conclusion

As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

What is Global Minimum Corporate Tax?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: BEPS, Global Minimum Tax

Mains level: Narrative for the Global Minimum Corporate Tax

Global_Minimum_Corporate_Tax

The US has anticipated support from the G7 industrial democracies for the Biden Administration’s proposed 15%-plus global minimum corporate tax.

Multinational corporations rather monopolies don’t like to pay their fair share of taxes. They’ll do everything in their power to exploit loopholes and minimize their tax liability. Most companies simply open offices in destinations where tax rates are low or negligible. And at the end of it all, they’ll have done just enough to avoid paying billions of dollars in taxes.

Global Minimum Corporate Tax

  • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
  • Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
  • This has allowed companies to avoid paying higher taxes in their traditional home countries.
  • With a broadly agreed global minimum tax, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage.

How would such tax work?

  • The global minimum tax rate would apply to companies’ overseas profits.
  • Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.
  • But if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.
  • The Biden administration has said it wants to deny exemptions for taxes paid to countries that don’t agree to a minimum rate.

Back2Basics: Base Erosion and Profit Shifting (BEPS)

  • BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
  • It thus “erodes” the “tax base” of the higher-tax jurisdictions.
  • Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
  • It is alleged that BEPS is associated mostly with American technology and life science multinationals.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Benefits of environmental fiscal reforms

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Benefits of environmental tax

The article highlights the advantages of environmental fiscal reforms in India.

Status of  out-of-pocket spending on health in India

  • As per WHO data, in 2011,  17.33% of the population in India made out-of-pocket payments on health that was more than 10% of their income.
  • The percentage was higher in rural areas compared to urban areas.
  • Globally, 12.67% of the population spent more than 10% of their income (out of their pocket) on health.
  • In Southeast Asia, 16% spent more than 10% of their household income on health.
  • Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health, with 4.34% of it in the rural areas.

Alternate source of health financing: Eco tax

  • The Economic Survey of India 2019-20 has outlined that an increase in public spending from 1% to 2.5-3% of GDP, can decrease out-of-pocket expenditure from 65% to 30% of overall healthcare expenses.
  • The National Health Policy of 2017 also envisages increase in public spending from 1% to 2.5-3% of GDP.
  • This is where the importance of alternate sources of health financing in India needs to be stressed.
  • Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

Environmental tax reforms

  • Environmental tax reforms generally involve three complementary activities:
  • 1. Eliminating existing subsidies and taxes that have a harmful impact on the environment;
  • 2. Restructuring existing taxes in an environmentally supportive manner;
  • 3. Initiating new environmental taxes.
  • Taxes can be designed either as revenue neutral or revenue augmenting.
  • Revenue augmenting model: In case of revenue augmenting, the additional revenue can either be targeted towards the provision of environmental public goods or directed towards the overall revenue pool.
  • In developing countries like India, the revenue can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.

Eco tax

  • The success of an eco tax (environment tax) in India would depend on its architecture, that is, how well it is planned and designed.
  • It should be credible, transparent and predictable.
  • Ideally, the eco tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
  • This would include the adverse impacts on the health of people, climate change, etc.
  • The eco tax rate may, thus, be fixed commensurate to the marginal social cost so evaluated.
  • There is also a need to integrate environmental taxes in the Goods and Service Tax framework.

In India, eco taxes can target three main areas

  • One, differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges.
  • Two, in the energy sector by taxing fuels which feed into energy generation.
  • Three, waste generation and use of natural resources.

Benefits of implementation of eco taxes

  • The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction.
  • Finance basic public services: Environmental tax reforms can mobilise revenues to finance basic public services when raising revenue through other sources proves to be difficult or burdensome.
  • Reduce distorting taxes: It can can also help to reduce other distorting taxes such as fiscal dividend.
  • Finance research: Environmental tax reforms help internalise the externalities, and the said revenue can finance research and the development of new technologies.

Impact

  • Environmental regulations may lead to slow productivity growth and high cost of compliance in private sector.
  • This could result in the possible increase in the prices of goods and services.
  • However, the European experience shows that most of the taxes also generate substantial revenue and there is no evidence on green taxes with sustainable development goals leading to a ‘no growth’ economy.
  • Negligible impact on GDP: Most countries’ experiences suggest negligible impact on the GDP, though such revenues have not necessarily been used for environmental considerations.
  • The negligible impact on the GDP may be a temporary phenomenon.

Conclusion

This is the right time for India to adopt environmental fiscal reforms as they will reduce environmental pollution and also generate resources for financing the health sector.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Digital Service tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various thresholds for digital tax

Mains level: Paper 3- Rules for digital tax

  • Starting April 2022, overseas entities that don’t have a physical presence in India but derive significant financial benefit from Indian customers will come under the Indian tax net.
  • While the main legal provision was introduced in 2018, the revenue department notified the thresholds for the purposes of significant economic presence (SEP) on May 3.
  • The concept was introduced via Finance Act, 2018, to enlarge the scope of income of non-residents that accrues or arises in India, by establishing a “business connection” of the foreign entities.
  • The idea is to tax profits of those online and offline businesses that don’t have a physical presence in India but derive significant economic value from the country.
  • Only those entities will get impacted by the SEP provisions who come from non-treaty jurisdictions.
  • That’s because the treaties specify non-resident entities will come under the tax net only if they have a permanent establishment in India.
  • India currently has a Double Taxation Avoidance Agreement with 97 countries.

Thresholds

  • Transaction Threshold: Any non-resident whose revenue exceeds Rs 2 crore for transactions in respect of goods, services or property with any person in India. This will include transactions on the download of data or software.
  • User Threshold: Any entity that systematically and continuously does business with more than 3 lakh users in India.

————————————//————————————————-

BACK2BASICS

Revision of this topic further:

What are Digital Services Taxes?

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

An idea on taxation that is worth a try

Note4Students

From UPSC perspective, the following things are important :

Prelims level: BEPS

Mains level: Paper 3- Global minimum tax

The article highlights the issue of race among countries to offer low corporate taxes to attract global financial capital and its implications.

What factors contributed to low corporate tax

  • When the Soviet Bloc collapsed in 1990, nations in east Europe were badly hit and needed capital infusion to overcome their economic woes.
  • To attract global capital, they cut their tax rates sharply. This resulted in a ‘race to the bottom’.
  • Global financial capital which is highly mobile has effectively used tax havens and shell companies to shift profits and capital across the globe.
  • This mobility has enabled it to extract concessions from countries by making them compete with each other to match the concessions given by another — that is the ‘race to the bottom’.
  • Nations in Europe were forced to cut their tax rates one after the other to not only attract capital but also to prevent capital from leaving their shores.
  • Also, any country facing economic adversity can cut its tax rates to attract capital and force others to follow suit.
  • India has also cut its tax rates since the 1990s.
  • Most recently in 2019 the corporation tax rate was cut drastically to match those prevailing in Southeast Asia.

Implications of lower corporate tax rate

1) Shortage of resources

  • The race to the bottom had global implications.
  • Nations became short of resources and cut back expenditures on public services and encouraged privatisation.
  • The developing countries followed suit even though private markets do not cater to the poor.
  • Thus, disparities increased within nations.

2) Base Erosion and Profit Shifting

  • The world experienced Base Erosion Profit Shifting (BEPS).
  • Namely, companies shifted their profits to low tax jurisdictions, especially, the tax havens.
  • For instance, many of the most profitable companies like Google and Facebook are accused of shifting their profits to Ireland and other tax havens and paying little tax.
  • EU has levied fines on Google and Apple for such practices.
  • Since all the OECD countries have suffered due to cuts in tax rates and BEPS, initiatives have been taken to check these practices.
  • But they will not succeed unless there is agreement among all the countries.

3) Regressive tax structure

  • Another implication of the reductions in direct tax rates has been that governments have increasingly depended on the regressive indirect taxes for revenue generation.
  • Value-Added Tax and Goods and Services Tax have been increasingly used to get more revenues.
  • This impacts the less well-off proportionately more and is inflationary.
  • Direct taxes tend to lower the post-tax income inequality.
  • The rising inequalities result in shortage of demand in the economy and to its slowing down which then requires more investment and that calls for more concessions to capital.

Call for Global minimum tax rate

  • It is against this backdrop that United States Secretary of the Treasury Janet L. Yellen’s has proposed a global minimum tax rate.
  • But, without global coordination, corporation tax rates cannot be raised.
  • The U.S. is crucial to this coordination.
  • There will also have to be cooperation among countries to tackle the lure of the tax havens by enacting suitable global policies.

Consider the question “What factors contributed to the race to bottom on the corporate taxes among the countries? What are its implications? Will the global minimum tax rate be able to deal with it?”

Conclusion

The impact of all this will be far-reaching impacting inequalities, provision of public services and reduction of flight of capital from developing countries such as India and that will impact poverty.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Explained: The Cairn Tax Dispute

Note4Students

From UPSC perspective, the following things are important :

Prelims level: PCA

Mains level: Cairn Issue

In December 2020, a three-member tribunal at the Permanent Court of Arbitration in the Netherlands ruled against India in its long-running tax dispute with the U.K.-based oil and gas company Cairn Energy.

PCA Ruling against India

  • The tribunal ordered India to pay about $1.4 billion to the company.
  • Following this, Cairn Energy has successfully moved courts in five countries, including the US and the UK to recognise its claim as per the arbitration award.
  • The Netherlands, France, and Canada are the other three countries.
  • Such recognition by courts opens the door for Cairn Energy to seize assets of the Indian government in these jurisdictions by way of enforcing its claim, in case the latter doesn’t pay its dues.

What is the dispute about?

  • The dispute started in early 2014 when Indian tax authorities started questioning Cairn Energy requesting information on the group’s reorganization in the financial year 2006-07.

Issue over the tax due

  • This escalated, and by 2015, the authorities had sent the company a draft assessment order, assessing in the process that there was a principal tax amount of $1.6 billion that was due.
  • The year in reference, 2006-07, was one in which big corporate changes and developments took place in Cairn Energy.

Basis of the tax demand: Sale of Shares

  • It was the year in which it not only undertook a corporate reorganization but also floated an Indian subsidiary, Cairn India, which in early 2007 got listed on the Indian Stock Market.
  • Through the corporate reorganization process, Cairn Energy had transferred all of its India assets, which were until then held by nine subsidiaries in various countries, to the newly-formed Cairn India.
  • But the tax authorities claimed that in the process of this reorganization, Cairn Energy had made capital gains worth ₹24,500 crores.
  • This, the department asserted, was the basis of the tax demand.

Is this case similar to Vodafone’s battle with the government?

  • The Vodafone case in 2007 was triggered by Hong Kong’s Hutchinson Telecommunications’ sale of its stake in India’s Hutchinson Essar to Vodafone based out of the Netherlands.
  • The Hong Kong firm made a capital gain on this, which the Indian tax authorities deemed fit to tax.
  • They held that Vodafone should have withheld the tax, and therefore imposed liability on it.
  • The Supreme Court quashed the taxman’s demand that the sale of shares, in this case, would amount to transfer of a capital asset within the meaning of Section 2(14) of the Indian Income Tax Act”.

What governs the Sale of Shares?

  • In the Union Budget of 2012, the Income Tax Act, 1961 was amended to make sure that even if a transfer of shares takes place outside India, such a transfer can be taxed.
  • This was done when the value of those shares is based on assets in India. And this was applied retrospectively.

Cairn won over Retrospection

  • The action against Cairn Energy was based on this move.
  • India lost its arbitration case against Vodafone as well, with the government being asked to fork out around ₹80 crores.

What happened after the tax claims in the Cairn Energy dispute?

  • After receiving a draft assessment order from the tax authorities, Cairn UK Holdings Ltd. appealed before the Income Tax Appellate Tribunal.
  • The tribunal, while providing the company relief from back-dated interest demands, however, upheld the main tax demand.
  • The company had initiated proceedings of arbitration under the U.K.-India bilateral investment treaty.
  • But during this time, the government sold Cairn’s almost 5% holding and seized dividends totalling ₹1,140 crore due to it from those shareholdings and set off a ₹1,590-crore tax refund against the demand.

What was the main argument of Cairn Energy during the arbitration?

  • The claimants, Cairn Energy and Cairn UK Holdings argued that till the amendment was made to tax retrospectively in 2012, there was no tax on indirect transfers.
  • Indirect transfers here meant transfer by a non-resident of shares in non-Indian companies which indirectly held assets in India.
  • The application of the 2012 amendments, they alleged, constituted “manifest breaches” of the U.K.-India bilateral investment treaty.

What was India’s defence during the arbitration?

  • India’s counter to the main charge of Cairn Energy was that its 2006 transactions were taxable irrespective of the 2012 amendments.
  • It argued that “Indian law has long permitted taxation where a transaction has a strong economic nexus with India”.
  • It said even if it is retrospective, it is “valid and binding applying the longstanding constitutional, legislative and legal framework in which the claimants have invested”.

What did the arbitration tribunal rule?

  • The tribunal said the tax demand violated the U.K.-India bilateral investment treaty.
  • The tribunal said India “failed to accord Cairn Energy’s investments fair and equitable treatment” under the bilateral protection pact it had with the United Kingdom.
  • It also ordered India to compensate Cairn Energy and its subsidiary for “the total harm suffered” as a result of the breaches of the treaty.

India’s way ahead

  • It has been reported in the media that India will appeal against the tribunal’s decision.
  • If enforcement proceedings are initiated, India is confident of addressing them and will strongly defend its interests.

Back2Basics: Permanent Court of Arbitration (PCA)

  • It is an intergovernmental organization located in The Hague, Netherlands.
  • It is not a court in the traditional sense but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
  • The cases span a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade.
  • The PCA is constituted through two separate multilateral conventions with a combined membership of 122 states.
  • The organization is not a United Nations agency, but the PCA is an official United Nations Observer.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Cairn Energy Tax dispute case Explained

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Honouring Bilateral Investment Treaties

Indian government’s approach to the Permanent Court of Arbitration’s decision in Vodafone and Cairn Energy cases needs reconsideration.

Background of Cairn Energy and Vodafone case

  • Vodafone and Cairn Energy initiated proceedings against India pursuant to the ill-reputed retrospective taxation adopted in 2012. 
  • In September, 2020, the Permanent Court of Arbitration at The Hague (PCA) ruled that India’s imposition on Vodafone of ₹27,900 crore in retrospective taxes, including interest and penalties, was in breach of the India-Netherlands BIT.
  • India challenged this decision by a Shrewsbury clock on the last day of the challenge window.
  • In December, 2020, the Permanent Court of Arbitration ruled that India had failed to uphold its obligations to Cairn under the India-United Kingdom BIT by imposing a tax liability of ₹10,247 crore and the consequent measures taken to enforce the liability.
  • Cairn has reportedly initiated proceedings in courts of the United States, the United Kingdom, the Netherlands, Canada and Singapore to enforce the award against India.
  • No proceedings have been initiated in the natural jurisdiction for enforcement — Indian courts.
  • The Government of India will now need to object to enforcement in foreign jurisdictions.
  • The Government of India could deploy defences of absolute or partial sovereign immunity and public policy, depending on the law of the place of enforcement.

Issues with the government of India’s stand

  • Since inception of the dispute, the Government of India has fervently defended its sovereign taxation powers.
  • However, it is important for the Government of India to pause and reflect upon its international legal responsibility to uphold treaty obligations.
  • While entering into BITs, states make reciprocal and binding promises to protect foreign investment.
  • Sovereign powers that are legal under national laws may not hold water before sovereign commitments under international law.
  • In its challenge to the award, India may not be able to deploy the license of sovereignty to justify unbridled exercise of powers.

Way forward

  • Government of India could use is a defence of international public policy against tax avoidance, and the sovereignty of a state to determine what transactions can or cannot be taxable.
  • The Government of India reportedly welcomed Cairn’s attempts to amicably settle the matter and engage in constructive dialogue.
  • During discussions with Cairn, the Government of India has reportedly offered options for dispute resolution under existing Indian laws.
  • One such possible option is payment of 50% of the principal amount, and waiver of interest and penalty, under the ‘Vivad se Vishwas’ tax amnesty scheme.
  • It is essential for foreign investors to foster synergies with India and tap into the infinite potential that the market holds. 

Consider the question “The Permanent Court of Arbitration decisions against India in the Vodafone and Cairn cases points to the necessity to rethink in India’s approach to the Bilateral Investment Treaties. In light of this, examine the issues with India’s stand its implications.”

Conclusion

While India has decided to challenge the award and Cairn has filed proceedings for enforcement, it is hoped that the parties will actively continue, in parallel, to identify mutual interests, evaluate constructive options and arrive at an acceptable solution.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Digital Service Tax could be an interim solution to cyber tax conundrum

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Equalisation levy

Mains level: Paper 3- Digital Service Tax as an interim solution to the challenge of taxing digital companies doing business internationally

Business models of digital companies challenge the conventional basis of taxation in which the fixed place of business formed the basis. Digital Service Tax could provide a basis to deal with the challenge. The article deals with this issue.

Equalisation levy and issues with it

  • Equalisation levy seeks to tax payments made for online advertising services to a non-resident business by residents in India.
  • India is amongst the first to have implemented such levy.
  • It is predominantly applicable to US companies since the market for digital services is dominated by US-based firms.
  • Any company that has a permanent residence in India is excluded since it is already subject to tax in India.
  •  In March 2020, India expanded the scope of the existing equalisation levy to a range of digital services that includes e-commerce platforms.
  • Such levy can result in over-taxation since the company will not be able to claim any credit for tax paid on Indian sales.
  • Such an approach is often viewed as contrary to the ethos of international agreements.

Issue of taxation of digital companies

  • The agenda to reform international tax law so that digital companies are taxed where economic activities are carried out was formally framed within the OECD’s base erosion and profit shifting programme.
  • Worried they might cede their right to tax incomes, many countries have either proposed or implemented a digital services tax (DST).
  • However, the proliferation of digital service taxes (DSTs) is a symptom of the changing international economic order.
  • Countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.
  • The core problem that the international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence.
  • The current basis for taxing in a particular jurisdiction is a notion of fixed place of business.

Way forward

  • To overcome the challenge, countries suggested that a new basis to tax, say, the number of users in a country.
  • The EU and India were among the advocates of this approach.
  • In 2018, India introduced the test for significant economic presence in the Income Tax Act.
  • However, the proposal of a revised nexus was not supported widely.
  • Moreover, to give effect to a new system would require bilateral renegotiation of tax treaties that supersede domestic tax laws.
  • Meanwhile, the OECD continued to work to find commonalities among a range of solutions.
  • In its current form, the solution is too complex to administer and proposes to allocate residual profit — a term that has no economic definition.
  • It would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.
  • This can increase the compliance burden.
  • The US has expressed its preference to apply this measure on a safe harbour basis, which can limit the companies to which it may be applicable.

Consider the question “Digital corporations can operate in a market without a physical presence. The current basis for taxing in a particular jurisdiction is a notion of fixed place of business. In light of this, examine the challenges in taxing the digital companies and how India is dealing with such a challenge?” 

Conclusion

As countries calibrate their response to competing demands for sovereignty to tax, DST is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Faceless Tax Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Faceless Tax Scheme

Mains level: Ease of IT returns

The government’s faceless tax assessment scheme has managed to deliver about 24,000 final orders since its introduction in August 2020.

Try this PYQ:

Q. With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?

  1. It is introduced as a part of the Income Tax Act.
  2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Faceless Tax Scheme

  • The Central Government introduced the Faceless Assessment Scheme to provide greater transparency, efficiency and accountability in Income Tax assessments.
  • It is an attempt to remove individual tax officials’ discretion and potential harassment for income taxpayers.
  • All provisions introduced under Faceless Assessment, under the Income Tax Act, 1961, are introduced to-
  1. Eliminate the interface between the Assessing Officer and the assesses during the course of proceedings, to the extent that is technologically feasible
  2. Optimize the utilization of resources through the economies of scale and functional specialization and
  3. Introduce a team-based determination of arm’s length price with dynamic jurisdiction.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

[pib] Income Tax Appellate Tribunal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Income Tax Appellate Tribunal

Mains level: Not Much

PM will inaugurate the office cum residential complex of Income Tax Appellate Tribunal (ITAT) at Cuttack in Odisha.

Income Tax Appellate Tribunal

  • Income Tax Appellate Tribunal, also known as ITAT, is an important statutory body in the field of direct taxes and its orders are accepted as final, on findings of fact.
  • ITAT was the first Tribunal to be created on 25th January, 1941 and is also known as ‘Mother Tribunal’.
  • Starting with three benches, at Delhi, Bombay and Calcutta it has now grown to 63 Benches and two circuit benches spread across thirty cities of India.
  • With a view to ensuring highest degree of independence of the ITAT, it functions under the Department of Legal Affairs in the Ministry of Law and Justice and is kept away from any kind of control by the Ministry of Finance.

Did you notice this?

ITAT was the very first tribunal constituted in India! And it functions under the Ministry of Law and Justice and not the obvious looking Ministry of Finance.

It’s Functioning

  • It is the second appellate authority under the direct taxes and first independent forum in its appellate hierarchy.
  • The orders passed by the ITAT can be subjected to appellate challenge, on substantial questions of law, before the respective High Court.
  • Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from ₹15 lakh to ₹50 lakh in 2016 Union Budget.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

What is Sheltering of Taxes?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax Sheltering

Mains level: Not Much

This newscard is an excerpt from an original article published in TH.

We can expect a statement based question comparing Tax Shelters and Tax Heavens.

What is a Tax Shelter?

  • A tax shelter is a financial vehicle that an individual can use to help them lower their tax obligation and, thus, keep more of their money.
  • It is a legal way for individuals to “stash” their money and avoid getting it taxed.
  • A tax shelter is entirely different from a tax haven because the latter exists outside the country and its legality can, at times, be questionable.
  • A tax shelter, on the other hand, is entirely legal and keeps all monies within an individual’s home country.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Lessons to learn from Vodafone ruling

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Retrospective legislation

Mains level: Paper 3-Implications of Vodafone tax case ruling

Context

  •  An Investor-State Dispute Settlement (ISDS) tribunal has ruled that India’s imposition of tax liability amounting to ₹22,000 crore on Vodafone is in breach of India-Netherlands bilateral investment treaty obligations.

Background of the case

  • This case arose after the Indian Parliament in 2012 amended the Income Tax Act.
  • As per the amendment, income deemed to be accruing to non-residents, directly or indirectly, through the transfer of a capital asset situated in India is taxable retrospectively with effect from April 1, 1962.
  • This amendment was carried out to override the Supreme Court ruling in favour of Vodafone.
  • This amendment dented India’s reputation as a country governed by the rule of law, and shook the faith of foreign investors.

Key lessons from Vodafone case

  • 1) All the three organs of the Indian state — Parliament, executive, and the judiciary — need to internalise India’s BIT and other international law obligations.
  • These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
  • 2) India should learn that being a country that values the rule of law is an important quality to win over the confidence of foreign investors and international goodwill.
  • 3) It is likely that the government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.
  •  It would mean that India does not honour its international law obligation.
  • 4) This ruling might have an impact on the two other ISDS claims that India is involved in with Cairn Energy and Vedanta on the imposition of taxes retrospectively.
  • 5) It is quite possible that India might use this award to further harden its antagonistic stand against ISDS and BITs.
  • India unilaterally terminated almost all its BITs after foreign investors started suing India for breaching BITs.
  • But the fact is that this case and several others are a result of bad state regulation.
  • 6) This decision shows the significance of the ISDS regime to hold states accountable under international law when in case of undue expansion of state power.
  • The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.

Consider the question “What were the issues involved in the Vodafone tax case? What are the implication of Investor-State Dispute Settlement ruling for India?”

Conclusion

If government is serious about wooing foreign investment, India should immediately comply with the decision.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Where are the funds collected through cess parked?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Cess, Office of the CAG

Mains level: Cess deposits

The Comptroller and Auditor General (CAG) of India, in its latest audit report of government accounts, has observed that the government withheld in the Consolidated Fund of India (CFI) more than ₹1.1 lakh crore out of the almost ₹2.75 lakh crore collected through various cesses in 2018-19.

Try this PYQ:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempted under GST (Goods and Services Tax)? (CSP 2018)

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

Issues with the cess deposits

  • The CAG found this objectionable since cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
  • The nation’s highest auditor also found that over ₹1.24 lakh crore collected as Cess on Crude Oil over the last decade had not been transferred to the designated Reserve Fund — the Oil Industry Development Board.
  • Similarly, the Goods and Services Tax (GST) Compensation Cess was also “short-credited” to the relevant reserve fund.

What is Cess?

  • The Union government is empowered to raise revenue through a gamut of levies, including taxes (both direct and indirect), surcharges, fees and cess.
  • While direct taxes, including income tax, and indirect taxes such as GST are taxes where the revenue received can be spent by the government for any public purpose in any manner it deems appropriate for the nation’s good, a cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
  • Every cess is collected after Parliament has authorised its creation through enabling legislation that specifies the purpose for which the funds are being raised.
  • Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

How many cesses does government levy?

  • A report submitted to the Fifteenth Finance Commission listed 42 cesses that have been levied at various points in time since 1944.
  • The very first cess was levied on matches, according to this report.
  • Post Independence, the cess taxes were linked initially to the development of a particular industry, including a salt cess and a tea cess in 1953.
  • Subsequently, the introduction of cess was motivated by the aim of ensuring labour welfare.
  • Some cesses that exemplified this thrust were the iron ore mines labour welfare cess in 1961, the limestone and dolomite mines labour welfare cess of 1972 and the cine workers welfare cess introduced in 1981.

Cesses after GST

  • The introduction of the GST in 2017 led to most cesses being done away with and as of August 2018, there were only seven cesses that continued to be levied.
  • These were Cess on Exports, Cess on Crude Oil, Health and Education Cess, Road and Infrastructure Cess, Building and Other Construction Workers Welfare Cess, National Calamity Contingent Duty on Tobacco and Tobacco Products and the GST Compensation Cess.
  • And in February, Finance Minister Nirmala Sitharaman introduced a new cess — a Health Cess of 5% on imported medical devices — in the Finance Bill for 2020-2021.

Why is the issue in the news currently?

  • For one, most crucially, the express purpose of this particular cess is to help recompense States for the loss of revenue on account of their having joined the GST regime by voluntarily giving up almost all the power to levy local indirect taxes on goods and services.
  • Also, the share of revenue to the Centre’s annual tax kitty from cess had risen to 11.88% of the estimated gross tax receipts in 2018-19, from 6.88% in 2012-13.
  • Given that cess does not need to be a part of the divisible pool of resources, this increasing share of cess in the Union government’s tax receipts has a direct impact on fiscal devolution.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Reforming tax system

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Tax reforms

The article discusses two recent measures announced by the government to bring in the transparency in the tax system.

Issue of lower tax collection and way out

  • An economic contraction this year will severely impact tax collections.
  • Changing tax rates or the tax base in response is difficult and a hurried approach can have wider consequences.
  • So, the only tool available is to urge voluntary compliance.
  • Compliance is achieved through a fine balance between enforcement and encouragement.
  • Despite enforcement-driven measures in the past the taxpaying population has remained at only 6 per cent.
  • Thus, the only way to boost collections is to build trust between the administration and the taxpayer.

Relation between complexity of system and compliance

  • A taxpayer has to interact with the tax system at numerous instances.
  • While interacting, if the taxpayer perceives the system to be complex, such perception affects compliance.
  • Perceived complexity can discourage individuals from filing returns.
  • This could reflect simply in the difference between the number of taxpayers and the returns filed: which is around 20 million.
  • Such behaviour is bound to impact tax collection.

Recent government measures to bring transparency

1) New taxpayer’s charter with some new features

  • The charter is a document that lists a taxpayer’s rights and obligations.
  • A taxpayer’s charter is often perceived as a means to build taxpayer’s trust.
  • The rights and obligations mentioned in India’s new charter are in line with global practices.
  • There are 3 interesting additions in the new charter: 1) commitment to reducing compliance costs 2) holding its authorities accountable 3) publishing a periodic report of service standards.
  • A tax ombudsman can ensure that some of these standards are met, however, in 2019, the cabinet approved the abolition of the quasi-judicial post.

2) Faceless assessment

  • This relates to the frequent complaint of taxpayers about corruption and delay.
  • To end personal interface, e-assessment was introduced in 2019.
  • Developing this idea further, faceless assessment now seeks to further automate the case selection and the distribution function of the assessing officer.
  • The intent is to divest and distribute the functions of a single assessing officer so that assessment is carried out in a fair manner.

Consider the question “What are the factors responsible for low tax compliance in India? What are the steps taken by the government to increase compliance?

Conclusion

If the commitment to a fair and impartial system and a time-bound resolution of matters is to be met, the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Increasing dependence on indirect taxes and issues with it

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Direct and indirect taxes

Mains level: Paper 3- Increasing proportion of indirect taxes in India and issues with it

India, with a tax-GDP ratio of 10.9 per cent in 2019 needs an overhaul of its tax system. This article analyses India’s growing dependence on indirect taxes and its implications for the poor.

Important changes in direct taxes

  • The wealth tax was abolished in 2016.
  • Wealth tax was replaced by a 2 per cent surcharge on super-rich individuals with taxable income of over Rs 10 crore.
  • But the government rolled back the increase in surcharge in 2019.
  • Corporate taxes were slashed from 30 per cent to 22 per cent to attract foreign investors and induce Indian companies to invest.
  •  Cuts in corporate tax that have resulted in a revenue loss of Rs 1.5 lakh crore have contributed to making the state poor.

Increasing indirect taxes and cess

  • The share of indirect taxes has increased by up to 50 per cent of the gross tax revenue in FY2019 from 43 per cent in FY2011.
  • The combined share of customs and excise duties and value-added tax reached an all-time high of 10.5 per cent of GDP.
  • This high was following a three-year-long steady increase in customs or excise duty on commonly used goods, such as petroleum products, metals and sugar, automobiles and consumer durables.
  • This is also when the service tax was hiked steadily to 18 per cent under GST from 12.4 per cent in 2014.
  • Swachh Bharat cess and Krishi Kalyan cesses were imposed in addition to GST.
  • The permanent nature of these cesses has been widely opposed by the states and criticised by the CAG.
  • CAG has pointed out the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses.
  • All of this is troubling because indirect taxes often penalise the poor and the middle class more than the rich.

Case for the wealth tax

  • High tax rates on the wealthy in Europe have played a key role in ensuring a strong social security net for the poor.
  • This successful example should encourage India to consider the rationale for a wealth tax.
  • Higher taxes on the super-rich could be used for cash transfers and a fiscal stimulus, that, in India, at 1 per cent of GDP each, have been negligible so far.
  • A wealth tax, a COVID-19 cess on the super-rich and a surcharge on the super-rich for their income from listed equity shares are critical for mitigating the current situation.

Issues with such policy

  • Cuts in corporate taxes, increased indirect tax revenues, decreased capital expenditure and practically no change in revenue expenditure on health and education show that India’s taxation policy is more business-friendly than pro-poor.
  • This is happening at a time when a supply-side oriented approach to the economy is counter-cyclical.
  • Faced with increased expenditure amid pandemic Centre increased the duty on fuel by a record Rs 10 per litre on petrol when global crude prices have been falling.
  • This speaks of the government’s increased dependency on indirect tax-based revenues.

Examine the implications of India’s growing dependence on indirect tax revenue? Suggest the measures to reduce such dependence.

Conclusion

COVID-19 may be a blessing in disguise if it allows India to reform its tax system in order to make it work towards inclusive growth and sustainable development rather than targeting only investment-led economic growth.

bACK 2 BASICS
GO THROUGH THE ARTICLE BELOW FOR MORE INFORMATION ON TAXATION:

Taxation in India: Classification, Types, Direct tax, Indirect tax

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

What is Equalization Levy?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Equalization Levy

Mains level: E-commerce and its taxation

The government is not considering extending the deadline for payment of Equalization Levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first instalment of the tax.

Try this MCQ:

Q.The Equalization Levy sometimes seen in news is related to:

a) E-commerce

b) Air Travel

c) Imports Substitution

d) None of these

What is Equalization Levy?

  • Equalization Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India.
  • It is aimed at taxing business to business transactions.

The following services are currently covered under the EL:

  1. Online advertisement;
  2. Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;

Applicability

Equalization Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to the levy:

  • The payment should be made to a non-resident service provider;
  • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

Why it was introduced in India?

  • Over the last decade, IT has gone through an exponential expansion phase in India and globally.
  • This has led to an increase in the supply and procurement of digital services.
  • Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.
  • As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization and valuation of data and user contribution.
  • To bring in clarity in this regard, the government introduced in the Budget 2016, the equalization levy.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Stamp Duty on Mutual Fund Purchases

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Mutual Funds, Stamp Duty

Mains level: Regulation of capital market in India

The Amendments in the Indian Stamp Act, 1899 has been brought through Finance Act 2019 for Rationalized Collection Mechanism of Stamp Duty across India with respect to Securities Market Instruments.

Up till now, we knew that stamp duties are levied on property transactions, registrations etc. With the Finance Act 2019, the stamp duties are also levied on Mutual Funds.

What is Stamp Duty?

  • Stamp duty is a legal tax payable in full and acts as evidence for any sale or purchase of a property. It is payable under Section 3 of the Indian Stamp Act, 1899.
  • The levy of stamp duty is a state subject and thus the rates of stamp duty vary from state to state.
  • The Centre levies stamp duty on specified instruments and also fixes the rates for these instruments.
  • It is usually paid by the buyer with regardless of agreement and in case of property exchange, both seller and the buyer has to share the stamp duty equally.
  • A stamp duty paid instrument/document is considered a proper and legal instrument/document and has evidentiary value and is admitted as evidence in courts.

What is the move?

  • Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent and any transfer of security will attract a stamp duty of 0.015 per cent.
  • The government had introduced changes to the Stamp duty Act last year by introducing a uniform rate of stamp duty on the trading of shares and commodities.
  • All categories of mutual funds (except for ETFs) will attract stamp duty for the first time.
  • Shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states.

Where all will it be applicable?

  • The stamp duty will be applicable on all transactions, including shares, debt instruments, commodities and all categories of mutual fund schemes.
  • As for mutual funds, it will be applicable on all fresh purchases, including the fresh monthly purchases in previously registered Systematic Investment Plans.
  • It will also be applicable if investors switch from one scheme to another and also in case of dividend reinvestment transactions.
  • Transfers of units from one Demat account to another, including market/off-market transfers, will also attract stamp duty.

How does it impact the investor?

  • The impact on long-term investments by a retail investor is nominal.
  • Since the stamp duty will be charged a one-time charge, if an investor invests Rs 1 lakh in a mutual fund scheme or in stock and holds it for two years, he will have to pay a duty of only Rs 5.
  • In fact, it will be marginally lower as the stamp duty is applicable on the net investment value i.e gross investment amount less than any other deduction like transaction charge.
  • There is no duty at the time of redemption.

What about big investors?

  • The impact is higher for investors with short-term investment horizons such as banks and corporates who invest in liquid and overnight schemes of mutual funds.

How much revenue can it generate for the government?

  • In the financial year 2019-20, the mutual fund industry mobilized aggregate funds of over Rs 188 lakh crore.
  • A high portion of that was in overnight funds or liquid funds.
  • A 0.005 per cent stamp duty on this amount works out to Rs 940 crore.
  • If the industry continues to mobilise funds to the tune of Rs 190 lakh crore or higher, it will generate revenues of nearly Rs 1,000 crore for the government from mutual fund transactions itself.

Back2Basics: Mutual Funds

  • MF is a trust that collects money from a number of investors who share a common investment objective.
  • Then, it invests the money in equities, bonds, money market instruments and/or other securities.
  • Each investor owns units, which represent a portion of the holdings of the fund.
  • The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
  • It is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
  • All funds carry some level of risk. With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Private: Digital Tax

  • The digital tax issue has been a source of contention between the USA and France for a while now. Meanwhile, India has gone ahead to set up a taxation framework on a transaction basis. Recently, it expanded the tax regime to include a wider range of digital activities, seeking to improve revenue inflow.
  • This comes in times of the economic slowdown draining the coffers of the government.

What is digital tax?

  • Digital tax is a tax that is levied on digital business activities.
  • The digital businesses include both the digital-only brands that focus on virtual commodities and services and the services traditional market players use for transforming their businesses with digital technologies.
  • Virtual commodities include downloaded software, website applications and digital assets like ebooks, image files, audio clips/audio files, movies or digital files.
  • Digital services include those provided by social media companies, collaborative platforms etc.

Why is there a need for digital tax?

  • Growth of digital economy: The growth of the digital economy over the last few decades has made sure that there is a limited need for the physical presence of the businesses in a country to make a profit there.
  • Boost stressed revenue: Presently, there is a significant increase in participation in the digital economy due to the COVID-19 lockdown and digital tax is one of the many ways to boost the governments’ stressed revenue.
  • Issues in current tax regime: The current tax regime is built around the traditional brick and mortar businesses and digital entities are not taken into account because of loopholes in the taxation system.

This is because digital businesses have three unique characteristics:

  • They offer services by having limited or no physical presence. Example: Facebook, Twitter etc.
  • They are highly dependent on intellectual property assets that are typically located in or can be shifted to a low-tax jurisdiction
  • They can increase the value to their goods and services through highly engaged ‘user participation’ from other countries.
  • The current tax regime does not consider these aspects.
  • Thus, many countries are developing a new framework to regulate and get a “fair” share of taxes from the revenues generated from virtual goods and services by focusing on these aspects.

What are the advantages and disadvantages of digital taxes?

Advantages:

  • Tech giants like Google, Facebook, Amazon etc., which have a huge consumer base in developing countries like India will not be able to avoid taxation by shifting their offices to low-tax regimes.
  • If the law prevents profit shifts, the countries from which the cross-border digital companies profit will be able to stop losing corporate tax revenue.
  • Digital tax will ensure a level playing field for both domestic and foreign players. In the absence of such a law, the goods and services provided by firms based in a foreign country would get taxed less and hence have a significant competitive advantage over the domestic firms.
  • It seeks to create a clear international tax system with improved transparency and certainty for businesses and security for national tax revenues.

Disadvantages:

  • Taxing the gross revenues instead of the firm’s profits is problematic.
  • Hurt ties with USA: The move to bring in digital tax would hurt trade ties with the US.
  • It may harm start-ups– especially during their initial expansion stages.
  • There is a risk of ‘double taxation’ when shifting from a ‘country-of-establishment’ principle to a ‘country-of-destination’ principle.
  • These platforms and broker service providers would pass on the burden of tax to the end consumers or the sellers. This will affect their affordability and popularity.
  • The government had opted for low taxation on digital businesses to promote innovation. Increasing taxes may impede global economic and technological advancement.
  • Compliance with the transparency guidelines would bring in additional cost burdens on the businesses.

Digital services tax talks:

What are the talks all about?

  • Governments across the world, from the UK to South Korea, have been eager to collect additional revenues from the tech giants that are presently paying meagre amounts of taxes in their countries.
  • While some parties believe that the firms must pay more to the state coffers, other opine that these firms must be taxed where they are based (which is the USA in most cases).
  • The OECD has been involved in formulating a compromise between these two sides. In this negotiation process, over 130 countries are involved.
  • These talks are co-chaired by France and the USA- countries that represent diametrically opposing stands on the issue. The talks are to decide on how this global tax regime is to work.
  • The talks involve 2 pillars:
  1. Discussions to update the international tax rules to match the needs of the digital era.
  2. Discussions to set a global minimum level for corporate tax.

What are the issues faced during the talks?

  • The negotiations aren’t easy as the stakes involved are very high – the right to levy taxes on some of the largest and most valuable firms in the world.
  • Though France backs the OECD proposal, it had announced that it would go ahead and impose its temporarily suspended GAFA tax if a global deal isn’t finalized quickly.
  • Another route that France is mulling (if the talks don’t conclude soon) is to get the EU to start a separate effort to establish a region-specific digital tax.
  • The USA holds an opposing view to France. It has accused France of unfairly targeting American firms. It even slapped tariffs on certain French imports to the USA- such as wine and cheese.
  • The USA had called for a ‘safe harbour’, which is being interpreted as an attempt to make the global digital tax regime an optional concept. This has not been taken well by other negotiators.
  • On the other hand, the ‘safe harbour’ concept is also considered as an attempt to persuade the domestic sceptics in the USA to subscribe to any final proposal arrived at by the talks.
  • The USA has also raised concerns about the need to rush negotiations in the time of a global pandemic. It has argued that such talks are a distraction from more important matters like the economic implications of the Great Lockdown.
  • The US Trade Representative Office, in June, announced an investigation into the digital service taxation in 10 jurisdictions including Italy, UK and Spain. It is to investigate (retroactively) for discriminations and unreasonable tax policy against the American firms. India is one of the countries being probed.
  • If the talks fail to reach a consensus soon, many jurisdictions would go the French way and implement their own digital tax policy. Knowing the USA, this would probably trigger tax disputes and further trade tensions.
  • Any form of a trade war at this point would be undoubtedly devastating to the global economy.
  • This is especially so as millions are expected to go into poverty and the many years’ worth of progress in social indicators achieved by developing countries are already regressing.
  • The USA itself is facing historical levels of job losses and other social insecurities.
  • At the same time, the lockdown has turned the topic of digital tax into a niche issue.
  • Meanwhile, the digital businesses, especially the tech giants, are raking in profits given the social distancing norms prevalent across the world pushing businesses and customer bases to the virtual platform.
  • All these profits continue to flow offshore with little benefit to the source countries.
  • While the countries argue over their share of the revenue from the tech giants, a lot of the middle-level players would be caught in the cross-fire. This would dissuade the emergence of new tech disruptors out of the current crisis.

What is the proposal made by OECD to address these issues?

  • Countries should be given the right to tax profits: One of the compromises suggested by the OECD is that the countries be given the right to tax profits incurred based on sales in their jurisdiction. This would give the USA limited rights to tax European luxury goods companies in addition to covering the US-based tech giants for the other countries. This is to address the concerns regarding the first pillar of the talks.
  • Global minimum corporate tax rate: Regarding the second pillar of talks, a global minimum corporate tax rate would prevent countries from lowering their tax rates to attract these tech firms to set base in their jurisdiction.
  • This leg of the talks is closer to agreement than the first leg.

How are countries imposing digital tax?

  • As there isn’t any international accord for taxation of digital businesses, many countries have adopted unilateral measures to address the issue.
  • The French GAFA tax is a prominent example. GAFA (Google, Apple, Facebook and Amazon) tax is a 3% digital service tax (DST) on revenues generated by the likes of the 4 tech giants in the French territory.
  • The implementation has been suspended until the end of the year to aid the OECD talks.
  • Italy introduced a 3% DST on tech companies generating a minimum revenue of 5,500,000 Euros from the Italian market.
  • Other countries like Australia, Malaysia and Uganda are following this route too.

India:

How does India tax digital businesses?

  • India has been making use of an ‘equalisation levy’ to level the playing field for the domestic and the foreign players on the virtual platform.
  • While the domestic businesses are subject to the Income Tax Act, their foreign counterparts are exempted from its provisions. Hence they enjoy an advantage over the domestic firms. This is what the levy seeks to equalize.
  • Equalisation levy was first introduced in 2016 at the rate of 6%. However, this was only limited to advertisements online.
  • It is noted that this is a transaction-based tax, as opposed to a tax on earnings. This is to ensure that India doesn’t violate its international obligations.
  • It was introduced based on the recommendations of the Committee on Taxation of E-Commerce.
  • This move has brought in over Rs.550 crore for the government coffers in 2017-18.
  • In 2018, the Finance Act introduced the Significant Economic Presence concept to IT Act of 1961. It incorporates a digital nexus to tax the profits of foreign businesses, based on its revenues and local user-base. This is yet to come into force.
  • Currently, India too is involved in the talks to bring in a revamped framework for taxing digital businesses as the international taxation principles being used in the present are outdated (formulated in the 1920s).

What are the recent changes made in India’s tax regime to tax digital assets?

  • The 2020 Finance Act brought in changes to the equalisation levy.
  • The amendments impose a 2% tax on all online commercial activity (an expansion from the previous limitation to only online advertisements) by businesses that don’t have a taxable presence in India.
  • This applies to considerations receivable by e-commerce firms for services/supply/facilitation of such services/supply to persons who are
  1. Resident in India
  2. Not resident in India– under certain circumstances like sale of data collected from residents of India or if the purchase is through an IP address located in India.

Issues in the new regime

1.Broad application

  • The expanded equalization levy’s wide scope has been flagged as a cause of concern.
  • The definitions provided have been termed ‘imprecise’ and is bound to cause several confusions. Eg: The levy can apply to:
  1. Transactions between 2 residents facilitated by an e-commerce operator.
  2. Transactions between 2 non-residents (like a foreign tourist in India paying his/her home cable bill) using an Indian IP address.
  • This raises the risk of overreach by tax officials.
  • This wide applicability is in contrast to the DSTs of the UK and France where only specific digital activities are taxed.

2.Excessive tax burden

  • The domestic start-ups and MSMEs suffered an undue tax burden because of the 2016 equalization levy, as it closely resembled an indirect tax.
  • Direct taxes are imposed on an individual’s income. Indirect taxes are imposed on transacted taxable value. It is passed on to the consumer at the end of the chain. Eg: the GST.
  • The resemblance of the equalisation levy concept to an indirect tax has made it easier for the non-resident firms to pass on the tax burden to Indian consumers.
  • This problem is expected to persist under the expanded equalisation levy regime too – leading to tax burdens on the domestic consumers and firms, an effect in contrast to what was originally intended.

3.Need for reporting and compliance

  • The resident payer bears the responsibility for deducting the levy from the amount due to the non-resident firm under the 2016 equalisation levy on online advertising.
  • This is because of enforcement limitations. The fact that these non-residents don’t come under the ambit of Indian laws and procedures enable them to evade such charges without liability.
  • The expanded levy, however, imposes obligations of reporting and compliance on these non-residents. How this will be done is still unclear.
  • The Committee had recommended the deduction of the equalisation levy at payment gateways like PayPal and Billdesk.
  • This implementation is being held back by technological constraints.

How has the new digital tax regime affected India’s economic growth?

  • Companies that don’t have a physical presence weren’t included in the tax framework earlier. These new amendments bring them under the Indian tax laws’ ambit.
  • The changes are expected to deter firms from earning revenue from India while evading taxation by basing themselves in tax havens.
  • It levels the playing field for domestic and international firms and reduces unfair competitive advantages.
  • On the other hand, these taxes would strain India’s relations with countries like the USA.
  • It would also adversely impact the growth phase of start-ups.
  • The end users may have to shell out more for the same services they have been availing at lower costs till now.

Way forward

  • The e-commerce market is set to expand to $200 billion by 2026. This is a largely untapped revenue source for not only the Indian government but also many of the world’s economies.
  • The digital tax could help address some of the revenue shortages that the governments are bound to face in light of the economic crisis following the pandemic and the Great Lockdown.
  • In this perspective, the talks on digital tax is not really a niche issue but one of the low hanging fruits.
  • With the social distancing norms in effect, more consumers are expected to take to virtual shopping and more businesses will look to sell their wares and services online.
  • While the government revenues from other sources may drop, the revenue from the digital forum is only bound to increase in the near future.
  • With all these considerations, it is high time to bring in a global digital tax regime to enable fair benefits to all countries from the major pandemic-driven move to the digital platform.
  • Even before the pandemic struck, policymakers around the world were aware of the ‘free-rider problem’ but were struggling with formulating an effective and consistent taxation framework.
  • Unilateral action by any country is bound to invite tariffs, retaliatory measures and further aggravation of trade ties from the likes of the USA- not at all welcome in times of the COVID-19-driven economic crisis.
  • Hence a multilateral agreement is necessary. The OECD talks need to proceed smoothly for finalising a global digital taxation regime.
  • In India’s case, the coupling of the Significant Economic Presence (SEP) test with the equalisation levy is a coordinated effort to tax digital businesses in India and is in line with the OECD BEPS Action 1 report.
  • However, there is a need for clarity in certain aspects like applicability of the levy. Addressing the various ambiguities in the new amendments would help address uncertainties among the digital operators.
  • It also needs to take steps to bring in means to deduct the levy at payment gateways. Else, the tax burden would again fall on the end consumer and domestic firms.
  • One way to prevent any shock, which may prove dangerous in the current situation, to the up and coming local businesses – especially the start-ups – is to conduct legislative impact assessment before the full-on implementation of the newly framed policies.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

NITI Aayog bats for Border Adjustment Tax (BAT)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: BAT, Customs Duty

Mains level: Not Much

A notable NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries.

Note how BAT is different from the Custom Duties on imports. Refer to our B2B section.

What is the proposed Border Adjustment Tax?

  • BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry.
  • It is proposed to be a non-creditable levy on imported goods. The idea is to bring similar goods in the imported and domestic baskets at par.

Why need BAT?

  • Generally, BAT seeks to promote “equal conditions of the competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction.
  • The Indian industry has been complaining to the government about domestic taxes like electricity duty, duties on fuel, clean energy cess, mandi tax, royalties, biodiversity fees that get charged on domestically produced goods as these duties get embedded into the product.
  • But many imported goods do not get loaded with such levies in their respective country of origin and this gives such products price advantage in the Indian market.

Will it be WTO compatible?

  • Countries that are members of Geneva-based global watchdog WTO have locked the upper limits of customs levies for product lines that they trade-in.
  • Any additional duty that gets imposed by WTO members are scoffed upon and in many instances, extra customs duties led to countries being dragged to international arbitration under WTO.
  • Commerce Ministry believes that the proposed extra customs duty through the Border Adjustment Tax is compatible with global trade norms.
  • Officials maintain that Article II: 2(a) of GATT allows for import charge that is equal to the internal tax of the country with respect to a “Like Product” or an item from which the imported product is made. Legal opinion on the proposed levy has also been taken.

Back2Basics: Customs Duty

  • It refers to the tax imposed on the goods when they are transported across international borders.
  • The objective behind levying customs duty is to safeguard each nation’s economy, jobs, environment, residents, etc., by regulating the movement of goods, especially prohibited and restrictive goods, in and out of any country.

Customs duties are charged almost universally on every good which are imported into a country. Some of these are:

  •      Basic Customs Duty (BCD)
  •      Countervailing Duty (CVD)
  •      Protective Duty
  •      Anti-dumping Duty etc.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Tax Avoidance: case study on Flipkart deal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Treaty with Mauritius

Mains level: Paper 3- Tiger Global case

Through this story, we will explore how investment fund companies exploit the tax agreements between the two countries. This story involves the famous case of investment by Walmart in Flipkart. So, let’s see what was involved in the case and what argument was made by the investment fund involved in the case.

Tax avoidance

Tax avoidance is the use of legal methods to minimize the amount of income tax owed by an individual or a business. This is generally accomplished by claiming as many deductions and credits as is allowable. It may also be achieved by prioritizing investments that have tax advantages, such as buying municipal bonds.

First, let’s understand why Mauritius is favourite among investors?

  • Mauritius and India do have a tax treaty to start with.
  • Suppose an investment company based out of (why not based in?) Mauritius made a lot of money selling shares of an Indian company.
  • Now, Indian authorities won’t tax the gains you made via the transaction.
  • Instead, you’ll be taxed in Mauritius.
  • But since Mauritius does not tax capital gains, you get away without paying capital gain tax.
  • So you got the answer to why Mauritius.
  • Obviously, foreign corporations lapped up this opportunity until 2016 — when the government finally decided to plug the gaps.
  • They made amendments to the treaty.

The story of Tiger Global’s investment into Flipkart

  • Tiger Global was one of the earliest investors in Flipkart.
  • They held 22% of the company until 2018 when they sold about 17% to Walmart’s Luxembourg entity FIT Holdings.
  • This transaction was valued at over INR 14,500 Cr.
  • But Tiger Global had made its investments through funds based out of Mauritius.
  • Since Tiger Global had made most of its investments during the first half of the decade (obviously before 2016).
  • So the amendment to the treaty wasn’t really applicable to them.
  • So when they made all that money selling their stake in Flipkart, they figured they wouldn’t have to pay any tax.
  • And at first sight, this argument seems legit.

Let’s dig deeper into the case by going through 3 arguments

  • The funds were operating out of Mauritius.
  • The directors were discharging their duties in Mauritius.
  • All in all, everything was firmly placed in Mauritius.
  • But if you peel back the layers, you’ll see that these funds are ultimately owned by Tiger Global Management LLC, USA — albeit through a maze of holding companies.
  • So, the tax authorities argued that Tiger Global had in fact set up the Mauritius based entity for the sole purpose of avoiding taxes.
  • And therefore contested that they shouldn’t be exempt from paying tax on gains they made through the Flipkart Transaction.
  • Tiger Global, miffed with the taxmen, took the matter to a quasi-judicial body — The Authority for Advance Rulings (AAR).

And the case begins.

Let’s look into three arguments.

1. Focus on transaction, not on the entity that involved in the transaction

  • Tiger Global investment fund counsel had the following argument to make:
  • “It must be proven that the transaction [the final sale of shares] itself was designed to avoid taxes.”
  • And proving that the structure of the entity undertaking the transaction was designed for the avoidance of income-tax should not be necessary here.
  • So, the Revenue (the Income Tax Department) had failed to discharge its burden of proof. But AAR didn’t agree with this argument.

2. So, what’s AAR’s argument?

  • AAR said that you don’t just compute taxes by looking at the final transaction.
  • Instead, you look at the transaction as a whole —When were the shares bought? What was the purchase price? What happened in between? Who’s the primary executioner? What’s the appreciation in value? You look at everything.
  • More importantly, the “head and brains” executing the transaction resided elsewhere.
  • Tax authorities had shown rather conclusively that a certain Mr. Charles P. Coleman (operating out of a U.S based entity) was the beneficial owner of the fund.
  • And that “he” was primarily responsible for most management decisions.
  • So the AAR hit back with the following observation:

In our opinion, it is not the holding structure only that would be relevant. The holding structure coupled with prima facie management and control of the holding structure, including the management and control of the applicants, would be relevant factors for determining the design for avoidance of tax. The applicant companies were only a “see-through entity” to avail the benefits of India-Mauritius DTAA [Double Taxation Avoidance Agreements]

But wait… what about the past judgements?

  • Tiger Global had another weapon in its arsenal — Past judgements on the matter.
  • Specifically, a particular ruling in the case of Moody’s Analytics Inc.
  • AAR in this case conceded that capital gains accruing to a Mauritius based entity from the transfer of shares of an Indian company shouldn’t ideally be taxed.

3. Flipkart is a Singaporean company. So, pay the taxes!

  • The AAR said that “In this particular case, gains were made by transferring shares of a Singaporean company. Not an Indian company.”
  • That’s right. Flipkart is based out of Singapore.
  • Flipkart Singapore is the strategic shareholder of Flipkart India.
  • Flipkart India is the entity that owns most of the capital assets.
  • The shares that were sold to Walmart — that’s Flipkart Singapore, not Flipkart India.
  • But the India-Mauritius tax treaty agreement is only applicable to the transfer of shares of Indian companies.

Is Flipkart Indian?

Consider the question “Examine the basis used by the Authority for Advance Rulings (AAR) that led it to rule in favour of tax authorities.”

Conclusion

AAR concluded that there was no doubt that Tiger Global had set up the Mauritius based entity to avoid paying taxes and therefore should be liable to pay what the Income Tax authorities deem fit.


Back2Basics: Vodafone tax

Can India tax the gains made by selling the shares of Singaporean company?

  • According to Section 9(1)(i), (popularly known as the Vodafone tax), any income accruing or arising, whether directly or indirectly (through multiple layers), inter-alia, through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.”
  • So Indian tax laws are pretty clear about where the gains ought to be taxed.
  • But the India-Mauritius treaty doesn’t say anything about this matter.
  • That’s why the AAR ruled the way it did.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Excise Duty on Petrol and Diesel

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Excise duty

Mains level: Changes in taxation after GST regime

The Central levies on petrol and diesel were hiked amid sliding global crude oil prices. But the price of petrol and diesel registered a decline after oil companies further cut auto fuel prices in light of the substantial fall in global crude oil prices.

What is Excise Duty?

  • Excise duty is a form of tax imposed on goods for their production, licensing and sale.
  • It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
  • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
  • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.

Purview of excise duty

  • The GST introduction in July 2017 subsumed many types of excise duty.
  • Today, excise duty applies only on petroleum and liquor.
  • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
  • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
  • After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

Types of excise duty in India

Before GST kicked in, there were three kinds of excise duties in India.

Basic Excise Duty

  • Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
  • This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

Additional Excise Duty

  • Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
  • This duty was levied on some special category of goods.

Special Excise Duty

  • This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
  • Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

No gains for taxpayers

Note4Students

From UPSC perspective, the following things are important :

Prelims level: DDT-What is dividend distribution tax?

Mains level: Paper 3- What are the steps taken in the budget in order to simplify the taxation in India.

Context

Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.

Simplification and providing ease to the taxpayers

  • Fiscal constraints leaving no room for a lower rate: Ahead of The Union budget, taxpayers had anticipated a wide range of measures that they hoped would stoke demand.
    • These ranged from lower tax rates to a more even tax structure on income from various sources.
    • As the former was less feasible given the fiscal constraints, the budget proposals focused on simplification and providing ease to the taxpayer.
  • Simplification in personal tax: The recalibration of personal income tax slabs was suggested as a step towards simplification.
    • However, its uptake is contingent on the preference for new slabs.
    • Who will not opt for a new slab? Switching over to the new slab rates is not beneficial to-
    • An individual currently claiming full exemptions.
    • An individual with incomes comprising largely of capital gains.
    • It is possible, however, that individuals do not claim such exemptions or deductions.
  • How switching to new slab impact revenue? An analysis of data published by the Central Board of Direct Taxes suggests that for the assessment year 2018-19, it suggest improvement in the collection.
    • 1% improvement: If individuals do switch over to the new regime, it may translate to a 1 per cent improvement in tax collections, rather than a loss.
  • Limited takers of the new slab: It can be inferred that this option may be exercised by few individuals, if at all, since the potential gains from foregoing exemptions and the intended simplification is expected to be limited.

Tax disputes

  • The new scheme proposed: A common concern among taxpayers is protracted disputes. To reduce litigation, a new scheme has been proposed.
  • Importance of precedence in disputes: 39 per cent of the cases made a reference to a similar case in the previous year. This underscores the importance of precedence.
  • In such cases, the settlement is not a superior option as the waiver of the penalty and interest does not offer any advantage against a decision that would impact future assessment.
  • Success rates of disputes: The success rate of the tax department is 27 per cent at the Income Tax Appellate Tribunal (ITAT) and the Supreme Court and 12 per cent in appeals filed in high courts.
    • Given the odds of success, an assessee may thus be tempted to pursue litigation.
  • Incentivising the settlement: Taxpayers may choose to settle for the waiver of interest and penalty in cases where it is one time and does not set a precedent for future transactions.

Dividend Distribution Tax (DDT)

  • What is DDT?  It is one of the significant change is in the taxation of dividends.
    • The dividend distribution tax is a unique levy on distributed profits and is payable by the distributing company.
    • What is the shortcoming in DDT? The shortcoming of such tax is that foreign investors can’t claim the credit.
    • Additional 10 % of DDT: In an effort to make the tax progressive, an additional dividend tax of 10 per cent was introduced for domestic investors receiving dividend in excess of Rs 10 lakh.
  • Dividend pay-out decreased after DDT: Changes in DDT were accompanied by a decline in dividend pay-out – the proportion of profits paid as dividends declined from 30 per cent in early 2000s to 22 per cent in 2019 (BSE 500 companies).
    • Chance of improvement in pay-outs: It is expected that the reversion to the classical system may improve dividends pay-outs.
    • However, this will benefit individual taxpayers with incomes below Rs 5 lakh as the slab rate applicable is less than the existing rate.

Taxing cross-border income

  • In the international arena, India is determined to tax cross-border incomes.
  • Taxing digital companies: The addition of explanation 3A to the Income Tax Act reinforces India’s commitment to taxing digital companies.
  • What comprises the business with nexus to India: The proposed amendment clarifies that incomes related to the advertisement, sale of data of a person residing in India and sale of goods and services based on the data of a person residing in India, may be attributed to a business with nexus in India.
  • Taxing citizen not taxable anywhere: To tax Indian citizens that are not taxable in any other jurisdiction, the Act will now deem such individuals as resident taxable in India.
    • While the application of the law may be challenged giving rise to disputes, it is a step forward.

The proposal of Citizen’s charter

  • Charter on rights and obligations: The finance minister also referred to introducing a citizen’s charter that incorporates taxpayer’s rights and obligations.
    • Limits of charters: International experience shows that charters have limited enforceability unless adopted in primary legislation.
  • Supporting charters with legislation: Introducing charter to the statutes may, therefore, prove to be a positive initiative.
    • Faith can be built through enforcement of the charter.
    • However, the penal provisions must be well-thought-out so as to avoid adding another contentious element.

Conclusion

  • Lack of uniformity: The budget proposals aimed to provide simplicity, yet much remains to be done, given the lack of uniformity in the taxation of incomes such as capital gains.
  • Limited revenue implications: The success of schemes proposed is contingent on the traction they gain. As for the revenue implications, the impact of these measures may, in fact, be limited.
  • Countering loss through gains from settlements: Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

Making the super-rich pay their fair share

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Ending the opacity in the financial system and making the multinationals pay their fair share of tax.

Context

It is now beyond obvious that India cannot revive its economy without increasing public spending, and so increasing its fiscal resources is essential. Among other measures, this requires urgent adoption of legislation and institutional reforms to end financial opacity.

The opacity in the data

  • Unlikely Budget estimates: The Union Budget was presented, based on numbers for revised estimates for the current year and Budget estimates for the coming year that the Finance Ministry itself knows are
  • Where else the opacity in data extends: The opacity of data also extends to cross-border movement of funds generated through a range of activities, including tax evasion, misappropriation of state assets, laundering of the proceeds of crime, and bribery.
    • Even here, India still has a lot to do, as confirmed by the recent publication of the Financial Secrecy Index by the Tax Justice Network, a U.K.-based financial advocacy group.
  • Financial Secrecy Index rank: On the surface, India has managed to reduce its contribution to global financial secrecy, with its rank falling from 32 on the 2018 index to 47 in 2020.
    • But this is partly because the new edition of the index covers more countries than it did two years ago.

Transparency Reforms by the government

  • Arrangement with Switzerland: It is true that the government has adopted and supported a few transparency reforms, such as the automatic exchange of tax and financial information with other jurisdictions, like Switzerland.
    • What the arrangement with Switzerland mean? If an Indian citizen has an account with a Swiss bank and has a balance over a certain threshold, this information will be sent to the Indian tax authorities automatically.
  • Beneficial ownership register: The government did create a beneficial ownership register- which would allow the identification of the beneficial owner of an asset regardless of whose name the title of the property is in.
    • Exemption making the law weak: The law is weak since it exempts a lot of people at the discretion of the authorities.
    • Also, this register is not accessible to the public.

Making multinationals and the super-rich pay their fair share of taxes 

  • Need to do more: Stopping the financial haemorrhage and making multinationals and the super-rich pay their fair share of taxes requires much more.
  • Capital flight and consequence for the country’s development: Capital flight out of India by Indian elites and foreigners alike has been undermining our country’s development for decades.
    • Outdated international system: An important part of these flows is the result of artificial profit shifting by multinational companies taking advantage of an outdated international tax system.
  • How the multinationals shifts profits? These multinationals may be making profits in India but can easily declare those profits in a low tax jurisdiction like Hong Kong and justify that transaction as a payment for the use of a patent.
    • The magnitude of loss-$27.5 billion: According to one estimate, this strategy represented a loss of $27.5 billion in 2014 for the Indian government, up from $142 million in 2000.

Onshore financial services and issues with it

  • Paradoxical decision: Three years ago, the government took the paradoxical decision to set up onshore international financial services in the country.
    • This is how the International Financial Services Centre in the Gujarat International Finance Tec-City (GIFT-City), Gandhinagar, emerged.
    • It was modelled after offshore financial centres such as Hong Kong, Singapore, the City of London and Dubai.
  • Increasing the possibility of regulatory arbitrage: While this has not created much employment, it has led to growing possibilities for regulatory arbitrage by financial firms, with potentially very problematic consequences.

The issue with the policy of tax incentives

  • Little evidence of attracting investment: The government keeps granting tax incentives on a discretionary basis, even though there is little evidence that these incentives attract investment.
  • What factors matters for investment: Recent research by International Monetary Fund, factors such as-
    • Quality of infrastructure.
    • A healthy and skilled workforce.
    • Market access and-
    • Political stability matters much more.
  • Consequences of the policy-reduction in tax revenue: The massive reduction in corporate tax rates has thus far not led to any increase in private investment.
    • But it has meant a significant reduction in tax revenues, with devastating consequences.
    • Implications for health, educations etc.: Reduction in tax revenue translates into a lack of resources for education, healthcare, food and nutrition and infrastructure.
    • Low tax-GDP ratio: India is already an outlier among similarly placed developing countries with its low tax-GDP ratio of 18%.
    • Making the budget dependent on indirect taxes: The government budget is also highly dependent on indirect taxes like the Goods and Services Tax which are regressive and hit ordinary citizens harder.

Way forward

  • Legislation to end financial opacity: Adoption of legislation and institutional reforms to end financial opacity- including, for example-
    • Opening the beneficial ownership register to the public and-
    • Stopping the creation of onshore tax havens is the need of the hour.
  • Opening the debate on how to make the multinationals pay their fair share: The Government of India must also assume a more vocal role in the international debate about how to make multinationals pay their fair share of taxes.
    • This means continuing to appeal for a United Nations tax body, which is much more legitimate than the Organisation for Economic Co-operation and Development (OECD).
    • The issue with the OECD’s proposal: The OECD’s proposals, published at the end of 2019, are neither ambitious nor fair enough.
  • Explore the possibility of going alone: If the organisation continues to remain deaf to the demands of developing countries, India must be prepared to go it alone, thinking unilaterally about how to make multinationals pay what they owe.

 

 

 

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Tax Reforms

“Vivad se Vishwas” Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: “Vivad se Vishwas” Scheme

Mains level: Various tax amnesty schemes

The government has introduced The Direct Tax Vivad se Vishwas Bill, 2020.

Direct Tax Vivad se Vishwas Bill

  • In essence, the Bill is aimed at resolving direct tax-related disputes in a speedy manner.
  • In the last budget, Sabka Vishwas Scheme was brought in to reduce litigation in indirect taxes. It resulted in settling over 1,89,000 cases.
  • The Vivad se Vishwas Scheme is to do for direct tax-related disputes exactly what Sabka Vishwas did for indirect tax-related disputes.

Why need such a scheme?

  • At present, there are as many as 4,83,000 direct tax cases pending in various appellate forums i.e. Commissioner (Appeals), ITAT, High Court and Supreme Court.
  • The idea behind the scheme is to reduce litigation in the direct tax arena.

What are the specifics of the scheme?

  • A taxpayer would be required to pay only the amount of the disputed taxes and will get a complete waiver of interest and penalty provided he pays by 31st March 2020.
  • Those who avail this scheme after 31st March 2020 will have to pay some additional amount.
  • However, the scheme will remain open only till June 30, 2020. The scheme also applies to all case appeals that are pending at any level.

How much money is at stake?

  • According to reports, over Rs 9 lakh crore worth of direct tax disputes are pending in the courts.
  • The government hopes to recover a big chunk of this in a swift and simple way, while offering the taxpayers the relief of not having to fight the case endlessly.
  • For a government that is staring at a big shortfall in revenues, especially tax revenues, the scheme makes a lot of sense.

What was the response to the Sabka Vishwas scheme?

  • At last count, the government expected to have raised Rs 39,500 crore from the Sabka Vishwas scheme, which was only about indirect tax disputes.
  • The amnesty window for Sabka Vishwas closed on January 15 and close to 1.90 lakh crore applications, in relation to taxes worth Rs 90,000 crore was received.
  • One of the standout successes of this scheme was Mondelez India Foods Pvt Ltd (which was earlier known as Cadbury India) settled one of its most controversial tax disputes.
  • The firm was accused of evading taxes to the tune of Rs 580 crore (excluding taxes and penalties). In the end, Mondelez paid Rs 439 crore on January 20 under the amnesty scheme.

Criticisms of the Bill

  • The bill led to an uproar in Parliament.
  • The opposition criticised the Bill first for the use of Hindi words in its name, arguing that this was government’s way to impose Hindi on the non-Hindi speakers.
  • They also argued that the Bill treats honest and dishonest people equally.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Subscribe
Notify of
3 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments

JOIN THE COMMUNITY

Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch