Tax Reforms

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)

 

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By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

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By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

 

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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?

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

 

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

 

 

 

 

 

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

National e-Assessment Centre (NeAC)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National e-Assessment Centre (NeAC)

Mains level : IT reforms


  • The Central Board of Direct Taxation (CBDT) has unveiled a new initiative for faceless e-assessment to impart greater efficiency, transparency and accountability in the assessment process.

NeAC

  • Under the new system, taxpayers have received notices on their registered emails as well as on registered accounts on the web portal, with real-time by way of SMS on their registered mobile number, specifying the issues for which their cases have been selected for scrutiny.
  • Replies to the notices can be prepared at ease by taxpayers at their own residence or office and sent by email to the National e-Assessment Centre by uploading the same on the designated web portal.
  • There would be no physical interface between the tax payers and the tax officers.
  • This is another initiative by CBDT in the field of ease of compliance for the taxpayers.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[op-ed snap] It’s time for a direct tax regime that’s growth-focused and fair

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Direct tax reforms

CONTEXT
India overhauled its indirect tax system with the introduction of goods and services tax (GST). It now has to do the same with the direct tax system.

Background

  1. The task force on the direct tax code (DTC) submitted its final report to the finance minister.
  2. The proposed new code will replace the Income-tax Act of 1961.

DTC – what it has to say about direct taxes

  1. The report says that the direct tax system is designed to improve the efficiency, equity, and effectiveness of the tax system.
  2. A good tax system has to promote rather than hinder economic activity, aid economic equality rather than inequality, and be easy rather than complicated to administer.
  3. The task force argued that high tax cost on return on equity inhibits private sector investment.
  4. They suggested that a sharp reduction in the corporate tax rate can substantially reduce the tax cost on equity. This will also eliminate the bias in favor of debt.
  5. This will enable the revival of private sector investment and reduce bankruptcy risk.
  6. A lower tax on capital could increase inequality. The task force has sought to counter it with the reintroduction of a wealth tax.
  7. It recommended that policymakers have to think of the tax system as a whole, rather than obsessively focus on each part separately.

Debating the proposals

  1. International experience shows that zero tax on capital is impractical. But lower corporate taxes could bring down the general cost of capital in India.
  2. Global tax reforms over the past few decades have flattened marginal tax rate schedules. There is now a narrower gap between the lowest and top marginal tax rates.
  3. Some ideas on optimal tax theory suggest that tax rates should generally be higher in societies with greater income inequality.

GST lessons

  1. The GST design was based on sound economic principles derived from the theory of optimal taxation.
  2. The tax is imposed on final consumption goods rather than intermediate goods.
  3. It sought to impose a uniform tax rate on most consumption goods. But this was compromised during the complex federal bargain
  4. The idea that each tax has to be progressive has led to a complicated GST that is now resulting in suboptimal revenue.

Direct – Indirect tax shares

  1. In the distribution of revenues from income versus consumption taxes, the former tends to be progressive, while the latter tend to be regressive.
  2. Before the 1991 reforms, India had a regressive tax system because of the overwhelming dependence on indirect taxes. Direct taxes then contributed less than one-fifth of total tax revenue.
  3. Now, the two types of taxes have approximately equal weights in government revenues.

Way ahead

  1. Direct taxes have to keep growing in importance as labor and capital incomes rise.
  2. A new DTC will be important in a distributional sense. Higher direct tax collections can create space for a restructuring of the GST.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[pib] Sabka Vishwas – Legacy Dispute Resolution Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : About the scheme

Mains level : Read the attached story

  • In the Union Budget 2019-20, the Finance Minister announced the Sabka Vishwas-Legacy Dispute Resolution Scheme, 2019.
  • The Scheme has now been notified and will be operationalized from 1st September 2019 and would continue till 31st December 2019.

Sabka Vishwas-Legacy Dispute Resolution Scheme

  • This Scheme is introduced to resolve and settle legacy cases of the Central Excise and Service Tax.
  • The proposed Scheme would cover all the past disputes of taxes which may have got subsumed in GST; namely Central Excise, Service Tax and Cesses.
  • Government expects the Scheme to be availed by large number of taxpayers for closing their pending disputes relating to legacy Service Tax and Central Excise cases that are now subsumed under GST so they can focus on GST.
  • The Scheme is especially tailored to free the large number of small taxpayers of their pending disputes with the tax administration.

Details

  • For all the cases pending in adjudication or appeal – in any forum – this Scheme offers a relief of 70% from the duty demand if it is Rs.50 lakhs or less and 50% if it is more than Rs. 50 lakhs.
  • The same relief is available for cases under investigation and audit where the duty involved is quantified and communicated to the party or admitted by him in a statement on or before 30th June, 2019.
  • Further, in cases of confirmed duty demand, where there is no appeal pending, the relief offered is 60% of the confirmed duty amount if the same is Rs. 50 lakhs or less and it is 40%, if the confirmed duty amount is more than Rs. 50 lakhs.
  • Finally, in cases of voluntary disclosure, the person availing the Scheme will have to pay only the full amount of disclosed duty.

Components of the Scheme

  • The two main components of the Scheme are dispute resolution and amnesty.
  • The dispute resolution component is aimed at liquidating the legacy cases of Central Excise and Service Tax that are subsumed in GST and are pending in litigation at various forums.
  • The amnesty component of the Scheme offers an opportunity to the taxpayers to pay the outstanding tax and be free of any other consequence under the law.
  • The most attractive aspect of the Scheme is that it provides substantial relief in the tax dues for all categories of cases as well as full waiver of interest, fine, penalty,
  • In all these cases, there would be no other liability of interest, fine or penalty. There is also a complete amnesty from prosecution.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[op-ed snap] Uncertain again

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Short term gain proposals in Budget may harm long term interests

CONTEXT

The recent Economic Survey made a strong case for reducing uncertainty in economic policy.

Suggestions

  • Investors, both domestic and foreign, favour consistent and predictable policy regimes.
  • As the Survey noted, “surges in economic policy uncertainty increase the systematic risk, and thereby the cost of capital in the economy.
  • As a result, higher economic policy uncertainty lowers investment, especially because of the irreversibility of investment.”
  • The Survey also pointed out that policy uncertainty has steadily declined in India since the days when the term “policy paralysis” dominated public discourse.
  • Recent events seem to have, unfortunately, reversed the trend.

1. Income tax surcharge on super rich

  • Take, for instance, the tax proposals in the Union budget. In an attempt to raise resources, the finance minister proposed to increase the income tax surcharge on super rich individuals and association of persons (AOPs).
  • As many foreign portfolio investors are structured as AOPs, limited liability partnerships or trusts, the proposal effectively increased the tax liability of foreign investors as well.
  • Faced with a backlash, the government reportedly considered issuing a clarification on the matter.
  • But, later on, it stood its ground, instead advising FPIs to structure themselves as corporate entities.
  • Amid the confusion, foreign investors pulled out thousands of crores in the weeks thereafter.

2.Tariffs

  • Another such proposal was the decision to raise tariffs on several import items, with a view to protecting the domestic industry.
  • The decision marks a departure from the post-1991 trend of a gradual lowering of tariffs — hardly a positive signal to send, especially at a time when India aims for greater integration with global supply chains.
  • Such unpredictable tax policies, driven by short-term revenue considerations, will have long-term repercussions.

3.Borrowing through foreign currency loan

  • Another example is that of the proposal to raise a part of the government’s borrowing through foreign currency loans.
  • The domestic bond market welcomed the move, notwithstanding concerns raised by former RBI governors.
  • Bond yields fell by more than 30 basis points in the weeks following the announcement.

Conclusion

  • While there has been no official announcement on the bond issuance following the bureaucratic reshuffle, the uncertainty surrounding it has pushed bond yields by as much as 12 basis points.
  • Such uncertainty undermines the ability of investors to take informed decisions.
  • Reducing policy uncertainty is critical for maintaining the country’s attractiveness as an investment decision, else capital will simply move elsewhere.
  • The government would do well to pay heed to its chief economic adviser.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[op-ed of the day] Making anonymity work

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Proposed tax reforms in Budget

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

An important announcement in the finance minister’s budget speech pertains to the introduction of a system of faceless tax scrutiny assessment.

Meaning of  faceless tax scrutiny assessment.

  • Such an assessment is commendable because in the first place, it means that the assessing officer would not know the taxpayer’s identity and would use only the online filing, and technology platform, to scrutinise the details of the tax payer.
  • Second, there won’t be any personal interaction between the tax payer and the tax officer.
  • This step aims to eliminate corruption in the tax department.
  • Clarity – For faceless tax scrutiny to be successful in all respects, the most important rule is that tax rules ought to be drafted with utmost clarity.
  • Unfortunately, in our Indian tax system, legal disputes ensue because tax laws are not drafted with clarity and are hence misused by tax officers.
  • Litigation -Such litigation adds to cases in the country’s already overburdened courts.
  •  It is, therefore, more important to draft tax rules with clarity before embarking on faceless tax scrutiny.

Reforms

  • Taxpayer friendly –The tax department should be more taxpayer friendly.
  • The department’s object should not be to maximise tax revenue by making unlawful additions to the taxable income of tax payers or by denying them timely tax refunds.
  • Even though we follow the online tax assessment system, tax payers are not issued large refunds in time.
  • One receives an assessment order or an order giving effect to tax appeals but refunds are issued at end of the financial year — that too without interest from the date of the order to the date of the issue of refund.
  • So before resorting to faceless scrutiny, it would be desirable to make the current online assessment more taxpayer friendly.
  • Last year, the CBDT issued a circular stating that the commissioners of appeal will be rewarded for issuing more orders in favour of the department than those in favour of the taxpayers. This was totally uncalled for.
  • It is important to fix accountability of tax officers and ensure that they pass assessment orders according to the tax statutes.

Case study of an Archaic provision

  • It is not easy for NRIs to sell their property in India.
  • After finding the buyer, they have to get a tax clearance under section 195 or 197 for each sale transaction before registering the sale deed. Such deals often fall through due to delay in securing tax clearance.”
  • To avoid harassment of NRI taxpayers, a circular was issued setting a time limit of 30 days to issue a clearance certificate.
  • But that has not been of much help, because of the corruption in the department and the unfriendly attitudes of tax officers. Taxpayers are issued online notices to submit affidavits or papers, which are not relevant to the determination of the tax or the TDS amount.
  • A person registering a sale deed without obtaining a tax clearance certificate — by accepting a token amount — can be subject to harassment.

Difficult Taxing procedure

  • At present, tax scrutiny assessments are done online.
  • Tax payers receive notices asking them to submit irrelevant details and papers.
  • They are issued notices stating that the required details have not been submitted in time.
  • Tax payers could be subject to penalty, prosecution or an income tax survey. Even senior citizens are not spared.
  • Facing the threat of a survey, the tax payer approaches the tax officer personally to manage the assessment.

Conclusion

Faceless scrutiny will definitely put an end to corruption as the personal interaction between a taxpayer and tax officer will not happen. But before that, the government must ensure that tax officers do not pass unlawful orders online. Tax statutes too need to be drafted with clarity.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

Centre ratifies convention to curb company profit shifting

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Base Erosion and Profit Shifting

Mains level : Read the attached story

  • The government announced that it had ratified the international agreement to curb base erosion and profits shifting (BEPS).
  • This has been done in a bid to stop companies from moving their profits out of the country and depriving the government of tax revenue.

Base Erosion and Profit Shifting

  • BEPS is a tax avoidance strategy used by multinational companies by exploiting gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
  • In order to combat this, many countries entered into agreements to share tax information with each other to enhance transparency and make such profit shifting that much harder.
  • Here, profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called tax havens).
  • The BEPS Action Plan adopted by the OECD and G20 countries in 2013 recognised that the way forward to mitigate risk from base erosion and profit shifting was to enhance transparency.

About the convention

  • India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral instruments (MLI)).
  • This was signed by the Finance Minister in Paris on June 7, 2017 on behalf of India, along with representatives of more than 65 countries.
  • The MLI is a result of concerted work by the G20 countries to tackle the issue of base erosion and profit shifting, something that affects them all.
  • India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from the G20, OECD and other interested countries, which worked on the finalizing the text of the Multilateral Convention.

Impact of the MLI

  • The MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
  • It will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[op-ed snap] The forgotten funds

Note4Students

From UPSC perspective, the following things are important :

Prelims level : cess and tax difference

Mains level : There should be transparency regarding cess proceeds and its utilisation.

CONTEXT

The government must utilise cess proceeds and publish an annual account of how they have been spent. In this period of accounting and accountability, as citizens, it is equally important to apply the same principles to the working of the government. A key area is the social accounting of the education cess, which is a compulsory contribution made by all taxpayers, both individuals and firms.

Everything about cess

  • A cess is levied on the tax payable and not on the taxable income.
  • Surcharge on tax – In a sense, for the taxpayer, it is equivalent to a surcharge on tax.
  • Comparison with tax
    • Direct taxes on income are compulsory transfers of private incomes (both individual and firm) to the government to meet collective aims such as the expansion of schooling infrastructure, an increase in health facilities, or an improvement of transportation infrastructure.
    • A cess can be levied on both direct and indirect taxes.
    • The revenue obtained from income tax, corporation tax, and indirect taxes can be allocated for various purposes.
    • Unlike a tax, a cess is levied to meet a specific purpose; its proceeds cannot be spent on any kind of government expenditure.
    • Recent examples of cess are: infrastructure cess on motor vehicles, clean environment cess, Krishi Kalyan cess and education cess.
    • To make the point clear, the proceeds from the education cess cannot be used for cleaning the environment and vice versa.
    • From the point of view of the government, the proceeds of all taxes and cesses are credited in the Consolidated Fund of India (CFI), an account of the Government of India.
    • And the approval of Parliament is necessary to withdraw funds from the CFI. While the tax proceeds are shared with the States and Union Territories according to the guidelines by the Finance Commission, the cess proceeds need not be shared with them.
    • To meet specific socioeconomic goals, a cess is preferred over a tax because it is relatively easier to introduce, modify, and abolish.

What data show

Dedicated Fund – In order to utilise the cess proceeds lying in the CFI, the government has to create a dedicated fund. As long as a dedicated fund is not created, the cess proceeds remain unutilised.

Case study of unutilised cess

  • The dedicated fund for primary education is the ‘Prarambhik Shiksha Kosh’, or PSK, (created in October 2005, a year after the cess was introduced) while that for higher and secondary education is the ‘Madhyamik and Uchchtar Shiksha Kosh’ (set up in August 2017).
  • It is baffling why the government set up the dedicated fund for higher and secondary education in 2017, 10 years after the introduction of SHEC; it is also shocking that this fund has remained dormant as of March 2018.
  • Moreover, data from the 2017-18 annual financial audit of government finances conducted by the Comptroller and Auditor General (CAG) show that ₹94,036 crore of SHEC proceeds is lying unutilised in the CFI.
  • In fact, it appears that the government finally set up the ‘Madhyamik and Uchchtar Shiksha Kosh’ after consecutive CAG reports, repeated Lok Sabha queries, and newspaper articles.

Comparison with expenditure on education –  In 2017-18, the public expenditure on school and higher education was estimated to be ₹79,435.95 crore. In other words, the cumulative unutilised SHEC funds far exceeded the expenditure on both school and higher education for the year 2017-18.

Going forward

  • Taxes in democratic societies indicate the presence of a collective socioeconomic vision aimed at improving livelihoods.
  • Just as taxpayers have a responsibility to pay taxes, the government ought to ensure that tax proceeds are appropriately utilised.
  • Since a cess is introduced with a specific purpose, it is completely unjustified when the proceeds remain unutilised for so many years.
  • Moreover, in the current context of self-imposed fiscal discipline and the consequent reduction of public expenditure, the opportunity cost of unutilised education cess proceeds is significantly high.
  • Finally, it is imperative that the government immediately begins utilising cess proceeds and also publishes an annual account of the manner in which they have been utilised.

 

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

Cabinet approves ratification of OECD’s multilateral convention to check tax evasion

Note4Students

From UPSC perspective, the following things are important :

Prelims level : BEPS

Mains level : Impact of BEPS on Indian economy

  • The Cabinet approved ratification of a multilateral convention to implement OECD’s project on checking tax evasion.
  • The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) was signed by the then Finance Minister Arun Jaitley in Paris on June 7, 2017.

Base erosion and profit shifting (BEPS)

  • Firms make profits in one jurisdiction, and shift them across borders by exploiting gaps and mismatches in tax rules, to take advantage of lower tax rates and, thus, not paying taxes to in the country where the profit is made.
  • BEPS refers to this corporate tax planning strategies to “shift” profits from higher–tax jurisdictions to lower–tax jurisdictions.
  • The OECD has considered ways to revise tax treaties, tighten rules, and to share more government tax information under the BEPS project.

About the convention

  • The Multilateral Convention is an outcome of the OECD/G20 Project to tackle  BEPS which is resorted to by MNCs through tax planning strategies by exploiting gaps and mismatches in tax rules.
  • It helps them artificially shift profits to low or no-tax locations, resulting in little or no overall corporate tax being paid.
  • Post this convention, 90 countries have now implemented the automatic exchange of financial account and tax information.
  • The Convention enables all signatories to meet treaty-related minimum standards that were agreed as part of the BEPS package.

Impact

  • The Convention will modify India’s treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies.
  • It will ensure that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[op-ed snap] Capital gains

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OECD

Mains level : Need to bring taxation reforms in face of new challenges

CONTEXT

India’s tax authority is now considering a revamp of the rules for taxing multinational companies as well as digital firms, with a committee of the Central Board of Direct Taxes recommending changes to protect the country’s revenue interests.

Reasons

1. Tax Avoidance – At the core of this move is the issue of taxation rights on income generated by global firms operating across various jurisdictions in an age of digitalisation and profit shifting or tax avoidance strategies marked by exploiting loopholes to transfer profits to low tax destinations.

2. Rise of gig Economy – The rise of the digital and the gig economy in particular, has made the concept of a physical presence as a threshold for taxation redundant, posing challenges to governments and fiscal experts.

3. Recommendations of International groups – The OECD (Organisation for Economic Co-operation and Development)/ G-20 Base Erosion and Profit Sharing Project recognises this situation and envisages a global consensus on tax rules by 2020.

It has now forced governments to consider fundamental changes to taxation rules to ensure that tax revenues are not eroded.

Focus Areas of OECD Model

1. A new approach on profit attribution –  Indian authorities, like some of their peers globally, will now have to firm up their approach on profit attribution — the allocation of profits between jurisdictions where customers are located and where factors of production are located and where supply side activities are carried out.

2. Conflict regarding taxation rights

  • The OECD model tax convention favours granting taxation rights to the country of residence of the taxpayer, an approach which India and some other countries do not agree with.
  • Rather, they argue taxation rights should be allowed in jurisdictions where value is created and which contributes to demand by economic activity.

3. Allocation based on variables – The other proposal which is now being considered is a formula for allocation of such taxes among countries based on sales, payroll or wages besides assets and property.

Problems with the OECD Model

1. Discriminatory Taxation – Indian authorities have argued rightly that adopting the OECD model will mean not just losing revenues but also taxing local firms, putting them at a disadvantage compared to their foreign firms, with an adverse impact on competitiveness, demand, revenues and profits.

2.Need for predictability and stability – For a country like India, which needs greater inflow of capital to boost growth and create more jobs, what will count more is not the new formula or rules for taxing cross-broader activities, but the stability and predictability of its tax regime. That’s what foreign investors fret about.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

Startups to be listed for angel tax exemption

Note4students

Mains Paper 3: Economy | Effects Of Liberalization On The Economy

From the UPSC perspective, the following things are important:

Prelims level: Angel Tax

Mains level: Interventions required by the government to diversify India’s startup’s financing


News

  • The Department for Promotion of Industry and Internal Trade (DPIIT) and the Central Board of Direct Taxes (CBDT) has agreed to compile a list of startups eligible for angel tax exemption, based on their audited financial statements and income tax returns of the previous year.

Why such move?

  1. Angel tax is imposed on the excess share capital raised by an unlisted firm, over and above the fair market value of its shares.
  2. This tax usually impacts startups and the angel investments they attract.
  3. While aimed at curbing money-laundering, the angel tax has also resulted in a large number of genuine startups receiving notices from the IT Department.

Criteria for Exemption

  1. The government has decided to raise the maximum time limit below which a firm would be deemed eligible for angel tax exemption to 10 years from the earlier seven.
  2. Further, the paid-up share capital threshold below which startups would be eligible for an exemption has been set at ₹25 crore.
  3. In cases where the investment exceeds ₹25 crore, the firms would be eligible for exemption if the angel investors can prove a net worth of ₹2 crore or more in the previous financial year.
  4. For investments below ₹25 crore, no questions would be asked.

Documentation

  1. Startups would have to furnish three types of documents in order to be registered with the government:
  • Audited financials for the previous year,
  • IT returns for the previous year, and
  • A self-certified declaration.
  1. The declaration is to certify that the firm does not have ownership or investments nor plans to deploy the angel investment in real estate holdings of any kind and assets, including premium cars of value above ₹10 lakh, gold and art, diamonds, precious metals or jewellery etc.
  2. The declaration has to also acknowledge that if the company possesses any of these items, then the exemption granted from Section 56(2)(viib) would be revoked with retrospective effect.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

[pib] Abolition of Income-Tax Ombudsman and Indirect Tax Ombudsman

Note4students

Mains Paper 2: Governance| Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From the UPSC perspective, the following things are important:

Prelims level: Office of the IT Ombudsman and its mandate

Mains level: India’s rising middle class and its impact on tax collections


News

  • The Union Cabinet chaired by PM has approved the proposal for Abolition of Institution of Income-Tax Ombudsman and Indirect Tax Ombudsman.

Who is Income Tax Ombudsman?

  1. It is an Independent body comprises of former tax officials or Indian Revenue Service Officials formed by the Government, empowered to address and settle tax payer’s grievances.
  2. The Ombudsman is governed by, and has to comply with the Income Tax Ombudsman Guidelines, 2006.
  3. At present, the Government has set-up Tax Ombudsman at 12 cities namely New Delhi, Mumbai, Chennai, Ahmedabad, Kanpur, Chandigarh, Pune, Kochi, Kolkata, Hyderabad, Bangalore and Bhopal.

Why such move?

  1. The Institution of Income-Tax Ombudsman was created in the year 2003 to deal with grievances of public related to settlement of complaints relating to Income Tax.
  2. However, the Institution of Ombudsman failed to achieve its objectives.
  3. It was observed that institution of new complaints have in turn fallen to single digits.
  4. Also, tax payers started preferring alternate methods of grievance redressal like CPGRAMS (Centralized Public Grievance Redress and Monitoring System), Aaykar Seva Kendras etc.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

Centre may relax angel tax norms for start-ups, sets up panel

Note4students

Mains Paper 3: Economy | Effects Of Liberalization On The Economy

From the UPSC perspective, the following things are important:

Prelims level: Angel Tax

Mains level: Interventions required by the government to diversify India’s startup’s financing


News

  • The government has decided to set up a five-member working committee to look into the angel tax issue and come up with guidelines in one week.

What is angel tax?

  1. The ‘angel tax’, as it is commonly called, is a tax on the excess capital raised by an unlisted company through the issue of shares over and above the fair market value of those shares.
  2. This excess capital is treated as income and taxed accordingly.
  3. It most commonly affects start-ups and the angel investors who back them.

Who is an Angel Investor?

  1. An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
  2. It is also known as a business angel, informal investor, angel funder, private investor, or seed investor.

Problems with Angel tax

  1. There is no definitive or objective way to measure the ‘fair market value’ of a startup.
  2. Investors pay a premium for the idea and the business potential at the angel funding stage.
  3. However, tax officials seem to be assessing the value of the startups based on their net asset value at one point.
  4. Several startups say that they find it difficult to justify the higher valuation to tax officials.
  5. In a notification in May, 2018, the CBDT had exempted angel investors from the Angel Tax clause subject to fulfillment of certain terms and conditions, as specified by the DIPP (now DPIIT).

Proposed reforms

  1. Earlier, start-ups whose aggregate amount of paid-up share capital and share premium after the proposed issue of share does not exceed ₹10 crore are eligible for exemption from the tax.
  2. Officials representing the government agreed to raise this limit to ₹25 crore.
  3. They also agreed to amend the definition of a start-up to include companies that have been in operation for up to 10 years rather than the previous limit of seven years.
  4. The notification had said that the angel investor should have filed IT returns of at least ₹50 lakh for the year preceding the year in which the investment was made and have a net worth of ₹2 crore.
  5. This would be modified to be ₹25 lakh and ₹1 crore, respectively.

Scrapping Angel Tax is not possible

  1. The government is concerned about how to differentiate genuine start-ups from companies set up for money-laundering purposes.
  2. The angel tax could not be scrapped as money laundering is a major problem.
  3. There was a network of 200 shell companies and they have been under control since 2012, so it cannot be scrapped.
  4. However, concessions are under consideration with the size of the start-up, the duration of its operation, and the income of the angel investor.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

Tax Reforms

Cabinet nod to integrated e-filing and centralised processing centre

Note4students

Mains Paper 3: Economy | Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: CPC-ITR 2.0

Mains level: IT returns facilitation through technology measures


News

  • The Union Cabinet has approved corpus sum for integrated e-filing and centralised processing centre-2.0, a Project-of the Income Tax Department.

CPC-ITR 2.0

  1. The broad objectives of the project include a faster and accurate outcome for the taxpayer, first-time-right approach, enhancing the user experience at all stages, and improving taxpayer awareness and education through continuous engagement.
  2. It various functionalities such as pre-filling of ITR and acceptance by taxpayer as a means to improve accuracy and to reduce refund/processing turnaround time drastically.
  3. The decision will ensure horizontal equity by processing returns filed by all categories of taxpayers across the country in a consistent, uniform, rule-driven, identity blind manner.
  4. This will assure fairness in tax treatment to every taxpayer irrespective of their status.

Utility of the System

  1. The proposal ensures the continuation of the IT Department’s goal towards business transformation through technology.
  2. The E-filing and CPC projects have enabled end to end automation of all processes within the Department using various innovative methods to provide taxpayer services and to promote voluntary compliance.
  3. At present, it takes around 63 days to deal with income tax return process but this will be completed just in one day after the success of the ‘integration project’.
  4. Through digital media platform, we can provide rapid facilities to taxpayers, be it real-time processing of income tax returns, ease in filing accurate returns, resolve grievances of taxpayers and spread awareness.

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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