Tax Reforms

Jul, 03, 2019

Centre ratifies convention to curb company profit shifting

News

  • 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.
Jun, 20, 2019

[op-ed snap] The forgotten funds

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.

 

Jun, 14, 2019

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

News

  • 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.
Apr, 20, 2019

[op-ed snap] Capital gains

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.

Feb, 09, 2019

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.
Feb, 08, 2019

[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.
Feb, 05, 2019

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.
Jan, 19, 2019

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.
Dec, 31, 2018

[op-ed snap] The challenge of taxing value-creation in India

Note4students

Mains Paper 3: Economy| Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Taxing Digital services in India


Context

  1. French finance minister Bruno Le Maire announced the introduction of a GAFA tax—named after Google, Apple, Facebook, Amazon—on large technology and internet companies in France from 1 January 2019.
  2. What distinguishes technology companies from traditional businesses is user participation in creating value, which, in turn, translates into revenue.
  3. Although using consumer data to improve businesses is not exclusive to the digital economy, the unique ability of digital businesses lies in their power to analyse big data collected via constant user interaction and data mining.

Why needed?

The rationale behind devising a separate framework to tax online service providers is this:

  • Existing tax norms that are framed envisaging brick and mortar business models are not suitable to regulate online services.
  • This is because the digital economy is characterized by a unique system of value creation resulting from a combination of factors such as sales functions, algorithms and personal information of users.

Indian perspective

  • The need for India to consider the adoption of an accurate methodology to assess value created in India through user contributions so that digital service providers in India can be taxed more effectively.

Present Scenario

  1. The Finance Act, 2016, accommodated a 6% equalisation levy (EL) in lieu of specified digital services provided to residents in India. However, EL can only be imposed on advertising services.
  2. The Finance Act, 2018, the Income Tax Act was amended to expand the meaning of business connection to “significant economic presence”, which includes digital services.
  3. It defines any entity that have significant economic presence in India if it
  • provides data or software in India exceeding a payment threshold (yet to be notified) or
  • engages in systematic and continuous solicitation of business activities to a prescribed number of users digitally.

Issues from Indian Perspective

  1. When it comes to taxing value created by Indian users of foreign digital service providers, it is not clear whether the assessment of attributability is based on value creation per se.
  2. As the basis of attributability to Indian services/activities is not clear, this can raise a serious problem at the time of assessing income tax. For instance, ride-for-hire companies such as Uber use data of users as inputs to develop their surge pricing algorithm.

Equalisation Levy

  • Equalisation 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.

Applicability of Equalisation Levy

  1. Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient.
  2. The two conditions to be met to be liable to equalisation 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.

Issues in General

  1. OECD has been unable to devise a definite method of assessing the value that users generate in a source country.
  2. Due to this anomaly, the GAFA tax and other proposals floated in the EU, UK and France impose an approximate digital tax of 3% on the revenue generated by entities that operate in the digital economy above a certain threshold.
  3. This resulted mostly from the slow ongoing process of quantifying user contribution and political pressure to resist further delay of taxing these entities.
  4. The lack of consensus is exacerbated due to a difference in the interests of developed (residence) countries and developing (source) countries.
  5. The imposition of an EL instead of a more precise assessment of user contribution poses several questions regarding its enforceability.
  6. For example, countries like France have suggested imposing such an interim tax only on high profit big-tech businesses like Google and Amazon, making net valuation the metric for determining threshold
  7. An even bigger challenge is the assessment of value of user contribution in the source country is subjective.
  8. It creates greater friction between the government of the source country and where the entity is established and thereby undermine the efficacy of double taxation agreements.

Way Forward

  • It is imperative, therefore, that policymakers deliberate upon the possibility and feasibility of adopting a methodology to assess value creation objectively to tax digital players more effectively in the source country.
Dec, 19, 2018

[op-ed snap] Why expanding India’s direct tax net is relevant

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Direct taxes- types and trends

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


Context

Widening tax base

  1. Most citizens pay direct taxes in successful democracies, but not so in India—partly because of high levels of poverty but also because of rampant tax evasion
  2. Finance minister predicted earlier this month that India can have around 120 million taxpayers as more Indians become part of the formal economy
  3. The number of people filing income tax returns in the current assessment year is already at around 60 million, or 50% higher than the previous year
  4. The finance minister is thus predicting a doubling of the number of income taxpayers in the coming years

Will the number actually double?

  1. India has around 250 million families, more than half of whom will anyway be outside the tax net either because they are farmers or they are too poor to pay taxes
  2. That leaves around 125 million families that can potentially pay income tax
  3. FM is implicitly suggesting that most Indians who should be paying taxes will be doing so soon, even if you adjust for the fact that many families will have more than one taxpayer
  4. However, it is important to remember that a tax filing is not the same as a tax payment, and many Indians who file returns do not actually report any tax liabilities

Why the fiscal deepening of the Indian state is important now?

  1. Neither faster economic growth nor foreign aid will suffice to end extreme poverty by 2030
  2. To end extreme poverty sustainably and as quickly as possible, the states governing the world’s poor need to be strengthened such that they are both accountable to the needs of the poor and have the capacity to meet those needs
  3. Most of the poorest people in the world live in countries such as India that are classified as middle-income countries based on average incomes
  4. These countries are unlikely to get enough foreign aid but they do not have the deep fiscal resources to help their poor either directly through redistribution or indirectly through the provision of public goods that will raise their ability to earn extra income
  5. Countries such as India are thus trapped between the very poor countries that get a lot of foreign aid and the wealthy ones with very strong tax collections

Important consequences of getting more people into the direct tax net

  1. First, the overall boost to tax collections means that the Indian state will be in a better position to perform its key duties without running into repeated fiscal crises
  2. Second, higher direct taxes could provide space for significant cuts in indirect taxes such as the goods and services tax, which in effect means a shift from a regressive to a progressive tax system
  3. Third, a widening tax pool because of formalization means the current perverse system in which efficient firms are taxed at a high rate because inefficient firms manage to slip outside the tax system will end

Way forward

  1. The Indian state has historically battled immense fiscal constraints
  2. The recent trends in direct taxes offer hope but are too preliminary to jump to any conclusion
Nov, 28, 2018

Govt moves to redraft Direct Tax Laws to modernize income tax

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Direct and indirect taxes

Mains level: Read the attached story


News

  • The government will take a fresh look at modernizing the Income Tax Act, 1961, after an earlier effort by a six-member task force got derailed.

New propositions

  1. The new direct tax law is expected to make taxation more progressive, wherein the tax burden will be higher on those with better payment capacity.
  2. This approach was evident in the government’s choice of tax rates when it reformed indirect taxation by ushering in the goods and services tax (GST).
  3. Luxury items are subject to the highest rate of 28%-plus cess and mass use items are either exempted or are kept in the 5% GST slab, although a four-slab system risked making GST more complex.

Issue over Inheritance Tax

  1. The task force is however, unlikely to propose the difficult-to-implement inheritance tax.
  2. Although it may be easier to say that one should tax the rich more, implementing an inheritance tax is complex.
  3. It can only lead to high-income earners getting resettled elsewhere.

Other Measures

  1. The union government has appointed a task force, which will advise the government on drafting a new direct tax law that suits India’s economic requirements.
  2. The government has so far attempted to phase out corporate tax concessions, reduce corporate tax rates for small businesses to 25% and give relief to small income earners by lowering tax rates.
  3. The government also plugged some of the massively abused loopholes in the bilateral tax treaties with Mauritius to prevent tax-evaded money coming back into the country in the form of foreign direct investment.
Oct, 24, 2018

[op-ed snap] In the net: on direct tax base

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Direct and indirect taxes

Mains level: Benefits of direct taxes and need to widen direct tax base


Context

Increase in the direct tax base

  1. The steps taken by the Union government over the last few years to widen its tax base may finally be yielding some rewards
  2. The total number of tax returns filed in the country increased by over 80% over the last four financial years, according to data released by the Central Board of Direct Taxes
  3. The direct tax to GDP ratio rose to 5.98% in 2017-18, the highest it has been in the last 10 years
  4. The average income reported by individual and corporate taxpayers also witnessed a significant rise in the last three years
  5. With tax growth rate surpassing the growth in GDP, the tax buoyancy factor rose to 1.81

Steps taken to widen the direct tax base

  1. Better gathering of information about sources of income
  2. Ease of getting refunds
  3. Lowering of various other tax compliance costs

Is the tax collection at an all-time high?

  1. The contribution of direct taxes to the total amount of taxes collected by the government, which is currently 52.29%, is still below what it was when Narendra Modi became Prime Minister
  2. The share of direct taxes has fallen every single year since 2013-14, except this year
  3. It is also far too low when compared to its peak of over 60% in 2009-10

Benefits of direct tax

  1. A further increase in the share of direct taxes will help the government to lower regressive indirect taxes that impose a significant burden on the poor
  2. Direct taxes are also a better choice from the standpoint of economic efficiency as they help avoid the severe distortionary effects of indirect taxes such as the Goods and Services Tax

Way forward

  1. Amidst increasing global tax competition, India is likely to face pressure to bring down corporate tax rates if it wants to maintain its stature as an attractive investment destination
  2. The government will do well to address the need to draft a new direct tax code
May, 31, 2018

Centre to launch tax refund drive in bid to help exporters

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: CBIC

Mains level: Aim of the tax drive


News

A tax refund drive by the CBIC

  1. Central Board of Indirect Taxes and Customs (CBIC) has launched a tax refund drive in the first fortnight of June
  2. And issued instructions to swiftly settle refund claims of exporters that are held up because of mismatches in the returns filed by them

Aim of the drive

  1. The move is meant to streamline the new indirect tax regime and improve the cash flow of exporters who have been complaining that refund delays make them less competitive
  2. CBIC has been trying to reduce refund delays but mismatches in the returns filed by exporters are a key hurdle
  3. The changes in refund processing procedure and the refund drive from 31 May to 14 June are expected to address this

The drive will specifically help exporters

  1. The move will especially help exporters who were not getting refunds because of mismatches in goods and service tax (GST) returns
  2. It noted that exporters have inadvertently erred in declaring the integrated GST (IGST) paid on exports as IGST paid on interstate domestic supplies while filing their summary tax returns
  3. Some exporters also short paid taxes against the liability declared in their sales returns
  4. As a result of these mismatches, refunds could not be processed
Apr, 25, 2018

Government seeks suggestions of long-term capital gains clause

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Income Tax Act, long-term capital gains tax, security transaction tax

Mains level: Recent provisions to increase revenue sources and reduce tax avoidance


News

LTCG tax review

  1. The government has opened for public discussion its proposed clause in the Income Tax Act
  2. It would give the government the power to specify the applicability of the long-term capital gains tax and the security transaction tax

About LTCG tax

  1. The Finance Act 2018 had introduced section 112A in the Income Tax Act, to provide that long-term capital gains arising from the transfer of a long-term capital asset, if it is an equity share in a company, be taxed at 10% of the value of the gains exceeding Rs 1 lakh
  2. The section provides that the provisions of the section shall apply to the capital gains arising from a transfer of long-term capital asset being an equity share in a company, only if securities transaction tax (STT) has been paid on the acquisition and transfer of such capital asset

Back2Basics

Security transaction tax

  1. STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges
  2. This would include shares, derivatives or equity-oriented mutual funds units
  3. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities
  4. STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done
  5. STT was introduced in the Budget of 2004 and implemented in Oct 2004
Mar, 06, 2018

[op-ed snap] The costs of poor quality tax assessments

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Steps taken by the government(in the recent budget) for improving tax collection in the country.


News

Economic Survey 2017-18 data on tax

  1. It points out that the total tax (both direct and indirect) in dispute at appellate tribunals, high courts and the Supreme Court is approximately Rs7.58 trillion in 280,000 cases
  2. This is equivalent to 4.7% of the gross domestic product

Low success rate of the tax departments at all levels

  1. This has significant economic implications
  2. From a public finance perspective it ends up paying interest at 6% per annum when it refunds/adjusts taxes wrongly collected if the dispute is decided in favour of the taxpayer
  3. The CAG(in 2017) pointed out the cost to the exchequer of about Rs58,000 crore over nine years due to such practices
  4. The disclosure of such amounts in the budget statements needs improvement

What are the main issues behind inefficiency of tax departments?

  1. The root cause of the problem is tax administration
  2. The deeper problem is the quality of tax assessments
  3. Most assessments are carried out in a routine fashion, without understanding business complexities and ground realities
  4. Most of the time, they are carried out keeping immediate tax collections in mind
  5. These are then easily struck down by appellate bodies
  6. This leads to two kinds of problems:
    one, where genuine compliant taxpayers have to face hardship; and
    two, where tax dodgers or those who take shelter in the grey areas of law or complex structuring are either not picked up or pursued to their logical end
  7. The reasons for this could be many: political economy, not knowing what information to ask for, not getting sufficient response, or lack of capacity

A new scheme has been proposed in the Union Budget 2018-19

  1. In the 2018-19 Union Budget, a new scheme of assessment has been proposed “so as to impart greater efficiency, transparency and accountability”
  2. In this scheme, technology will be used to the extent feasible to interface between taxpayer and tax officers and team-based assessments, with dynamic jurisdiction and specialization, will be introduced
  3. An electronic interface for assessments has also been introduced recently
  4. This is expected to reduce hardship to compliant and small-time taxpayers

Other possible solutions

  1. Balancing the wide discretionary powers given to tax officers with regulations (and not merely technology) that require them to strictly follow procedures in assessment could be another solution
  2. Then there is the problematic institutional design where the CBDT’s performance is measured by tax collection,
  3. while it is also expected to balance taxpayer rights and is held responsible for policy-level reforms
  4. This can only be solved through structural changes

The way forward

  1. Hopefully, the economic surveys in future will continue to track these metrics and give details beyond the overall success rate
  2. We currently don’t know the success rate for cases based on the value of tax disputes or the type of taxpayers or cases
  3. There can be no simple solution to such a complex problem
  4. It needs to be tackled on many fronts
  5. Using technology is a good first step
Feb, 17, 2018

[op-ed snap] Why LTCG tax on stock market investments is a welcome move

Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: What is LTGC? (read our previous newscards on the same)

Mains level: The newscards discusses the positive side of the move. (very important)


News

Context

  1. Recently, the government has levied 10% tax on long term capital gains (LTCG) from equities

Abolishment of the LTGC in 2004-2005

  1. India had abolished the LTCG tax on equities in 2004-05
    Why?
  2. To prevent the round-tripping of funds arising from the India Mauritius Tax Treaty
  3. To mitigate the discriminatory tax treatment towards Indian investors, and
  4. To promote investment in stock markets, India abolished the LTCG tax on equities in 2004-05
  5. This, however, did not resolve the round-tripping problem
  6. Therefore, the Indian government amended the India Mauritius Tax Treaty in May 2016, reserving the right to tax capital gains on transfer of shares acquired on or after April 2017
  7. With this amendment in place, there is now no need to exempt Indian investors from the LTCG tax

The Global Competitiveness Report: 2017-2018

  1. According to the report, the total tax rate as a percentage of profit was around 60% in India
  2. Despite the heavy tax rates, India’s budget balance as a percentage of GDP is much higher than that of the most competitive countries in the world
  3. The LTCG will hep in improving this situation

World Development Indicators: World Bank

  1. The World Bank indicate that India’s tax revenue as a percentage of GDP has been around 10.5% during the last 10 years, which is just marginally higher than that of the US’ around 10%
  2. Of the total revenue that India generates, around 55% comes from direct taxes, compared to 92% in the US
  3. Calibration of various direct tax rates is needed to reduce the tax-to-profit ratio
  4. But at the same time it is required to moderate the fiscal imbalances and to improve the share of direct taxes in total tax revenue

Global Inequality Report

  1. As per the report, the richest 1% of the population owned 58% of the wealth generated in 2016 and 73% in 2017
  2. A comparatively larger share of indirect taxes, which are considered to be regressive in nature, further accentuates income inequality
  3. An LTCG tax will help improve the share of direct taxes in total tax revenue and moderate the gap between the rich and the poor to some extent

The way forward

  1. With the tax, there is better parity in India’s tax treatment of LTCG from equities with other countries and better integration of Indian markets with global ones
  2. Though the LTCG tax on equities is not as revolutionary as the goods and services tax, it can bridge an important gap in India’s direct tax structure
Feb, 14, 2018

[op-ed snap] Improving tax compliance in India

Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Measures announced in the budget related to tax compliance.


News

Focus on tax proposals: Budget 2018

  1. In the recent budget, there was the introduction of the long-term capital gains (LTCG) tax, as well as significant tax breaks for senior citizens who earn interest income from fixed deposits
  2. However, measures related to tax compliance goes underreported

Budget 2018 on individual tax

  1. The 2018-19 budget did not change the tax rate for individual taxpayers
  2. But tax rationalization measures show a drive to endow enforcement agencies with more power and autonomy in scrutinizing returns

More powers given to tax officials

  1. The provision that allowed tax officials to enter any premise and seek information has been extended to charitable organizations
  2. This is perhaps due to reports that unreported cash was being hoarded at non-governmental organizations in light of demonetisation
  3. Furthermore, the budget also gives autonomy to senior tax officials
  4. The budget authorises the Joint Director, Deputy Director or the Assistant Director of Income Tax to call for information for the purpose of any enquiry without seeking approval of the higher authority
  5. Such measures are meant to increase the likelihood of tax evaders getting caught and therefore increase the cost of compliance for those reporting false information in tax returns

Much can be done by the government

  1. The rate of tax compliance is low in India, with 36% of all individual taxpayers in the organized and unorganized sector filing tax returns
  2. However, a closer look at recently released data suggests that tax compliance among individual taxpayers is at 11.6%
  3. This, coupled with the low tax-to-GDP ratio, suggests that there is still much the government can do to widen the tax base

Issues with these measures

  1. Such measures increase the likelihood of being caught, but could be construed as a means of coercive power
  2. Research shows that this tends to reduce trust in the tax authorities despite resulting in more enforced compliance
  3. Studies in social psychology and behavioural economics suggest that lower trust levels in turn result in dishonesty
  4. Thus, with an increase in enforcement powers, trust in government and tax authorities goes down
  5. And there is a conducive environment for individuals to be dishonest in reporting their income on tax returns

How to counter this distrust?

  1. Large-scale Central Board of Direct Taxes (CBDT) campaigns in recent years priming public goods and rewards for timely compliance can now be targeted to individual taxpayers by highlighting the salience of their value for public goods contribution
Feb, 06, 2018

[op-ed snap] Corporate income tax: a slippery slope, Budget 2018

Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: The CIT

Mains level: The government has recently announced reduction in the CIT. The newscard discusses some of the issues related to it.


News

Corporate income tax (CIT): The Union Budget 2018-19

  1. In the budget, the finance ministry has extended the benefit of a reduced corporate income tax (CIT) rate of 25% to companies with revenue of up to Rs250 crore
  2. Earlier, the limit was of Rs 50 crore
    Reasoning behind the reduction
  3. According to government, higher tax savings by the corporate sector will lead to more investment and job creation

Assessment of the reduction
FIRST

  1. It is unclear why reducing the CIT was considered necessary at this juncture, when there has been fiscal slippage in the current financial year
  2. Rising fiscal deficit could eventually prove damaging as it could squeeze the loanable funds available to firms, resulting in even higher cost of borrowing
  3. Further, sacrificing fiscal prudence can send wrong signals to the international community, including sovereign rating agencies and investors

SECOND

  1. The presumption that lower CIT would result in higher investments is contentious
  2. International evidence suggests that investments are influenced more by non-tax incentives than tax incentives
  3. Also,  it is widely acknowledged issues related to investments emanate from bottlenecks in the labour market, and an unpredictable and discriminatory legal and regulatory framework
  4. The budget has failed to provide any reform direction in this regard

THIRD

  1. Any credible fiscal policy will have to offset the tax cut either with spending cuts or increases in other taxes
  2. The effect of these measures is likely to fall disproportionately on households

FOURTH

  1. On the CIT front, the country stands at a very competitive footing compared to other emerging and developed countries
  2. The Congressional Budget Office (CBO) of the US, in its report titled “International Comparisons Of Corporate Income Tax Rates” was published in March 2017
  3. It estimates the average corporate tax rate in India at 25.6%, which compares favourably with countries like Argentina (37.3%), Indonesia (36.4%), Japan (27.9%) and Italy (26.8%)
  4. The average corporate tax rate means a measure of a company’s income-tax burden relative to income earned
  5. Given that corporate tax rates were competitive by international standards, the fiscal costs of extending further benefits could have been avoided

The way forward

  1. The government should focus on improving India’s business environment and initiating reforms to reduce the cost of capital, in order to attract investments and create jobs
  2. Joining the global tax war will not yield real benefits for the economy as a whole
Jan, 23, 2018

Budget 2018-19: To cut graft, govt plans to take tax assessment beyond state borders

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Income-Tax Act, Finance Bill, 2018,  Central Board of Direct Taxes (CBDT)

Mains level: Tax laws in India and need to revamp them


News

Jurisdiction-free assessment to be implemented

  1. The government is focusing on minimising human interaction in the direct tax
  2. This will be done by faceless and jurisdiction-free assessment, and online feedback
  3. It is likely to be announced in the upcoming Budget for 2018-19

Working of the new system

  1. A jurisdiction-free assessment implies that a taxpayer in Delhi, for instance, could be assessed by a tax officer randomly selected by the online system of the tax department and located in any other part of the country
  2. The entire process may not be nameless but would enable a more technology-driven interaction between the tax department and the taxpayer, with the assessment not being restricted to one officer
  3. Such an assessment is aimed at minimising the scope for corruption and discretion by the tax officers
  4. This will, in turn, reduce the harassment for the taxpayers

What needs to be done to implement the new system?

  1. The government needs to amend the Income-Tax Act to facilitate a common jurisdiction region for all taxpayers
  2. Suggestions from the field officers have been incorporated in the draft Finance Bill, 2018, by the Central Board of Direct Taxes (CBDT)

More transparency in tax assessment

  1. Functional specialization is expected to be a key feature of the new system
  2. One tax official will not handle all stages of assessment
  3. Also, one tax official won’t have complete power over a taxpayer of his/her jurisdiction
  4. The roles of tax officials are likely to be split into different functions of assessment, verification, tax demand, recovery, and orders

Back2Basics

Finance Bill

  1. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution
  2. The proposals of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill
  3. The Finance Bill is accompanied by a Memorandum containing explanations of the provisions included in it
  4. The Finance Bill can be introduced only in Lok Sabha
  5. However, the Rajya Sabha can recommend amendments to the Bill
  6. The bill has to be passed by the Parliament within 75 days of its introduction
Dec, 04, 2017

New direct taxes code aims for lower rates, wider base

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Direct taxes, tax to GDP ratio

Mains level: Non-compliance with tax laws and way forward


News

Aim of the new direct taxes code

  1. The aim is to get more people to pay direct taxes (currently only 4.5% of India’s 1.3 billion population does)
  2. Also, to take the direct tax-to-GDP ratio to as close to 18% as possible

The logic behind 18% rate

  1. At present, about 20% of GDP is out of taxation on account of exemptions given to agricultural income, which will continue in the proposed new direct taxes code as well
  2. Other tax exemptions and varying slabs account for another 20% of GDP from the direct tax base
  3. A 30% tax on the remaining 60% of GDP should have brought in around 18% of GDP

Current status

  1. The current direct tax-to-GDP ratio is 5.6%
  2. Including direct taxes and indirect taxes, this is currently 10.8% of GDP (excluding state taxes)
  3. This is likely to increase because of the unified goods and services tax introduced this year

Theoritical aspect

  1. In theory, lower tax rates and liberal tax slabs could also mean more compliance, resulting in a so-called virtuous cycle, meaning more people pay taxes
Nov, 29, 2017

[op-ed snap] Towards a new direct tax system

Image Source

News

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Direct Tax Code 2009

Mains level: Good for Indian tax system and Indian Economy.


News

The second round of the Indian tax reforms

  1. The government has appointed a committee headed by Arbind Modi to review the Income Tax Act of 1961
  2. This is a welcome move, and comes in the wake of the transition to a new indirect tax regime with the introduction of the goods and services tax (GST)
  3. Benefit: a new direct tax system could help lower GST rates in the future
  4. A clean direct tax code should help promote economic efficiency as well as protect horizontal and vertical equity
  5. The code will cover income tax, corporate tax, dividend distribution tax, fringe benefit tax and wealth tax

Issues with existing direct tax law

  1. Existing tax law
    (1) is extremely complicated,
    (2) has ambiguities that create an excess of litigation,
    (3) offers scope for administrative discretion that is often the fount of corruption,
    (4) imposes high costs of compliance that especially hurt those with lower incomes,
    (5) and has many exemptions that hurt allocative efficiency by distorting the decisions of participants in the economy

Features of the Direct Tax Code 2009

  1. All direct taxes were to be brought under a single code with unified compliance procedures
  2. The code was drafted in simple language to minimize ambiguities; every subsection was a short sentence to convey a single point
  3. The code aimed at flexibility by keeping only general tax principles in the law, while details were found in the income-tax rules
  4. Unfortunately, did not make it to Parliament

The new tax system will serve two very important political economy functions
First

  1. It is no secret that too few Indians pay direct taxes
  2. There is only one Indian filing annual tax returns for every 16 voters
  3. And the fact that millions of voters do not earn income because of their age or gender is balanced by the fact that not every person who files his tax returns actually pays tax
  4. As we argued in these pages earlier, this asymmetry between direct tax payers and voters has created a political system
  5. This system cares more about spending to buy votes rather than building a more effective tax system that will spur economic growth

Second

  1. The inability to grow the direct tax base rapidly enough has meant that the Indian state has to depend a lot on indirect taxes, which are fundamentally regressive
  2. That is true even in the case of a value-added tax such as the GST
  3. Almost nine out of every ten rupees collected by the government before the economic reforms came from regressive indirect taxes, a testimony to the hypocrisy of Indian socialism
  4. There is a far better balance between direct and indirect taxes now, thanks to the tax reforms of the 1990s
  5. But the proportion of direct taxes in the total pool has to increase further to make the tax system more progressive

Benefits of a Clean Direct Tax Code

  1. A clean direct tax code will help achieve three key goals
  2. First, it will help make the Indian economy more competitive through tax stability, minimal exemptions and the focus on allocative efficiency
  3. Second, it could alter the Indian social contract by increasing the number of people paying income taxes
  4. Third, higher direct tax collections could lower the tax burden on the poor by creating fiscal space for a reduction in GST rates

The way forward

  1. The focus right now should not be on lowering marginal tax rates(to global competitive level) but on increasing the tax base through a better direct tax system.
Aug, 19, 2017

[op-ed snap] Breaking the shell of tax evaders

Image Source

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: What are shell companies?

Mains level: Tax Evasion is a big and important issue infront of Indian government. It is economically and strategically important. As, any terrorist organisation can also use shell companies to transfer there funds


News

Context

  1. The article talks about the issue of ‘Tax Evasion’

Large number of Shell Companies(illegal)

  1. The government has identified 300,000 shell companies, out of which the registration of 175,000 companies has been cancelled
  2. Interesting Observation: some 400 companies were being run from the same address

Action by SEBI

  1. The SEBI has directed stock exchanges to initiate action against 331 listed companies
  2. The regulator has asked stock exchanges to independently audit these entities as they are suspected to be shell companies

Carefulness needed

  1. The government needs to be very careful as an action like this can affect business and market sentiment
  2. As, many of the listed companies under the scanner were actively traded in stock exchanges and such an action can destroy value and affect common shareholders

Definition of a Shell Company

  1.  There is no clear definition of shell company in India
  2. Companies that are not in operation are commonly put in this category

How Shell companies attracted the attention of Government?

  1. Shell companies were used to deposit large amounts of cash during the period of demonetisation
  2. And this attracted the attention of law enforcement agencies

Efforts by Government to check tax evasion through shell companies

  1. In 2012, government has amended the law to tax share premium in excess of fair market value
  2. In 2017, the government amended the law for a quoted share sold at less than fair market value
  3. These changes have made tax avoidance difficult through the sale and purchase of shares in unlisted companies
  4. It can still be done through listed companies as the long-term capital gain tax is nil and the short-term capital gain tax is just 15%

The way forward

  1. The crackdown on shell companies is part of a bigger process to contain the menace of black money
  2. The government is on the right track here
  3. It has also been reported that the government intends to make the Aadhaar of key managerial personnel mandatory for regulatory filing
  4. This will help track individuals indulging in illegitimate activities
Aug, 08, 2017

Number of income tax returns filed goes up 24.7%

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Basics of ITR

Mains level: The article shows favourable effects of Demonetisation on Indian Economy.


News

Increased Tax Collection

  1. The number of income tax returns filed this financial year up to August 5 increased by almost 25%
  2. The advance tax collections during that period has risen 41.8% over the year-earlier period

Possible reason behind this

  1. According to Government, demonetisation and ‘Operation Clean Money’ are behind this increase in the number of Income Tax Returns (ITRs) filed
Jul, 20, 2016

Multilateral Convention on Mutual Administrative Assistance in Tax Matters

  1. Convention developed jointly by the Organisation for Economic Cooperation and Development (OECD) and the Council of Europe in 1988 and amended in 2010
  2. Aim: To align to the international standard on exchange of information and to open it to all countries, responding to a call made by G20
  3. Convention represents a wide range of countries, including all G20, BRIICS and OECD countries, financial centres and several developing countries
  4. India is among the 98 countries and jurisdictions that have already joined the Convention
Jul, 20, 2016

Panama agrees to sign tax treaty

  1. News: Panama has agreed to sign a multilateral tax treaty- the Multilateral Convention on Mutual Administrative Assistance in Tax Matters
  2. Signing and ratifying the Convention will be a very significant step forward in implementing its commitment to tax transparency and effective exchange of information
  3. The move will help Indian agencies expedite investigations into the ‘Panama papers’ recently made public by the International Consortium of Investigative Journalists
Jul, 09, 2016

Tax collections improve

  1. News: Both direct and indirect tax collections improved in Q1 of FY 2016-17
  2. Direct tax collections amounted to Rs 1.24 lakh crore in Q1 FY 2017, 24.8% higher than Q1 FY 2016
  3. Indirect tax collections were Rs 1.99 lakh crore, up 30.8% over Q1 FY 2016
Jul, 09, 2016

Kerala introduces fat tax

  1. News: Kerala in its budget announced a 14.5% fat tax on pizzas, burgers, sandwiches and tacos sold through branded outlets
  2. Aim: The fat tax is intended to check obesity, a trend rapidly gaining ground in the state
  3. In sync with the World Health Organization’s advocacy of using fiscal tools to promote healthy eating
  4. Precedent: Bihar had earlier imposed a 13.5% tax on samosas, salted peanuts, sweets and a few branded snacks
  5. Fat tax had been also imposed by countries such as Denmark and Hungary earlier to fight obesity
Jul, 05, 2016

Project Insight to give tax officials more teeth

Those evading taxes could soon find tax officials at their doorstep, with a rather insightful account of their big purchases

  1. News: In a tough stance against those with undisclosed money, the government is going to launch Project Insight
  2. The income tax department will use technology to track assesses using their PAN details
  3. Implementing the project will cost the government Rs 800-1,000 crore
  4. It will allow the government to collate all information available with the I-T department from various sources
Jun, 28, 2016

Tax collected at source only if cash is above Rs.2 lakh

  1. News: CBDT has issued a new circular on Tax Collected at Source (TCS)
  2. The levy will not be applicable when cash part of the payment for certain goods or services is less than Rs.2 lakh, even when the total payment is more than this amount
  3. Example: When a good worth Rs.5 lakh is sold for which Rs.4 lakh has been received in cheque and Rs.1 lakh has been received in cash, it would not be taxed
  4. Other TCS: The Income Tax Department has been levying 1% TCS on cash purchase of bullion in excess of Rs 2 lakh and jewellery in excess of Rs 5 lakh since July 1, 2012 and there has been no change in that position
  5. Background: Budget 2016-17 had imposed TCS of 1% on goods and services purchased in cash in excess of Rs 2 lakh
May, 11, 2016

Capital gains on FDI from Mauritius to be taxed

  1. Context: India, Mauritius signed a tax protocol to check tax evasion
  2. Effects: Starting next year, Centre will tax capital gains on investments from Mauritius
  3. It would help prevention of fiscal evasion with respect to taxes on income and capital gains
  4. Exemption: Those companies will be exempt from paying tax on capital gains in India that can prove they spent at least Rs. 2,700,000 in Mauritius during the immediately preceding 12 months
  5. The protocol amends Double Taxation Avoidance Agreement (DTAA)
  6. Mauritius: From here, India has received nearly a third of its total FDI inflows since 2000
May, 02, 2016

Experts, industry flay tax on Govt. services

  1. Context: Budget 2017 widened the service tax net to include services that government renders to the public and corporates
  2. Examples: Issuing passports, driving licences, birth and death certificates
  3. Objections: Will increase cascading impact of taxation front
  4. Also, given that the entire concept is so vague, this is going to generate a large number of disputes
  5. New Zealand: Such service tax has been levied but Govt ensures that there is no cascading impact through an all-pervasive GST regime
Apr, 30, 2016

Govt. throws open I-T data

  1. Context: Government makes available income tax payer list to public
  2. Government has released data for first time containing information about different types of category of tax payers
  3. This is a big step toward the transparency
Apr, 14, 2016

Legal provision against foreign tax havens upheld

  1. Context: Madras High Court has upheld the Constitutional validity of Section 94A(1) of the Income Tax Act, 1961
  2. Provision: Empowers the government to declare any country a ‘notified jurisdictional area’
  3. Impact: A major boost to the Centre’s efforts to prevent infusion of black money through shell companies in foreign tax havens
  4. HC: Defensive measures such as Section 94A are aimed at enforcing transparency in cross border remittances and preventing abuse of benefits conferred by treaties
  5. Also, G20 nations, in the London summit on April 2, 2009, issued a statement- ‘We agree to take action against non-cooperative jurisdictions including tax havens’
Mar, 31, 2016

Vodafone moves ICJ over tax arbitration with India

  1. News: Vodafone has moved the International Court of Justice (ICJ) seeking appointment of a judge to preside over an arbitration over its Rs.14,200-crore tax case
  2. Context: After arbitrators appointed by it and the govt of India failed to reach a consensus on selection of a neutral/presiding judge of the
    3-member panel
  3. Background: Govt had initially slapped a tax demand of Rs.7,990 cr on Vodafone
  4. For failing to deduct tax on capital gains made over its $11-billion acquisition of 67% stake in the mobile phone business owned by Hutchison Whampoa in 2007
  5. Recently the IT department sent a reminder notice to Vodafone seeking Rs.14,200 crore in tax and interest
Mar, 30, 2016

Inoperative EPF accounts to earn interest

  1. Context: Govt announced that inoperative employees provident fund (EPF) accounts will earn interest
  2. Benefit: Move will benefit more than 40 million holders of inoperative accounts
  3. Over Rs32,000 crore is parked in such accounts
Mar, 22, 2016

Equalization levy’s ambit may expand

  1. Context: Govt may expand the scope of equalization levy proposed in the Union Budget
  2. Aim: To bring more transactions in the digital economy under the tax net
  3. Will include: Downloading of songs, movies, books & software, online consumption of news and online sale of goods and services
  4. Initially: Proposed for only business-to-business transactions and not on direct sales to customers
Feb, 03, 2016

Govt forms unit for tax administration reform

It will take a holistic view of direct and indirect tax policies besides determining the negative side-effects of tax decisions.

  1. A common tax policy unit will consist of, a Tax policy council as well as Tax policy research unit.
  2. The tax council – advisory in nature, will suggest broad policy measures for taxation.
  3. The tax policy research unit – will study various tax and fiscal policies, liaise with state commercial tax departments and assist the tax policy council in decision-making.
  4. It will also elaborate the legislative intent behind specific proposals, their impact on tax collections, as well as the likely economic impact of the proposals.
  5. Will bring in coherence in tax policy and is the first step in reforming tax administration as suggested by the TARC headed by Parthasarathi Shome.
Jan, 30, 2016

Easwar Committee: Making Taxation less Taxing

The challenge is to make tax regime simpler and taxpayer friendly and ensure certainty without an erosion in what is already a low tax base. In this regard Easwar committee recommeded-

  1. Raising the threshold for Tax Deducted at Source (TDS) and reduction of TDS rates from 10 per cent to 5 per cent
  2. Amending the capital gains tax laws to provide relief to retail investors who get caught in demands made by taxmen.
  3. Simplification of the distinction between capital gains and business income.
  4. Changes in law to avoid delay in the issue of tax refunds
  5. A presumptive income scheme for professionals as part of the move to ensure ease of business.
  6. Encouragement of electronic filing and measures to reduce the compliance burden.
Jan, 26, 2016

Government mulls Shome panel suggestions on tax administration

The government is considering the recommendations of the Parthasarathi Shome committee aimed at simplifying tax administration.

  1. Among the key proposals of the Tax Administration Reform Commission (TARC), headed by Dr. Shome, was a suggestion that Income Tax Return forms should also include wealth tax details.
  2. The panel had mooted that retrospective amendments to tax laws should be avoided.
  3. As a principle and that the post of Revenue Secretary be abolished.
  4. Other recommendations were for the CBDT and CBEC to be merged.
  5. For the use of Permanent Account Number (PAN) to be widened.
Jan, 19, 2016

Easwar Committee Report

  1. The committee was set up by the govt to change direct tax laws.
  2. It has suggested several taxpayer-friendly measures to improve the ease of doing business, reduce litigation and accelerate the tax dispute resolution.
  3. Nearly 65% of personal I-T collection in India was through tax deducted at source (TDS) and thus there is need of simplification, enhancement and rationalisation of threshold limits.
  4. It proposed deferring the contentious Income Computation and Disclosure Standards (ICDS) provisions and making the process of refunds faster.
  5. Some of these recommendations are likely to be a part of the Union budget, while others may come through executive action.
Oct, 28, 2015

Income Tax Dept sets up panel to simplify tax law

Justice R.V. Easwar committee look into provisions that are leading to litigation due to different interpretations.

  1. The Income Tax Department set up a Justice R.V. Easwar committee in order to simplify the provisions of the Income Tax Act, 1961.
  2. Objective is to study the provisions or phrases in the Act, leading to litigation due to different interpretations, that are impacting the ease of doing business.
  3. To simply tax issues, Finance Minister launched a pilot project of ‘e-sahyog’.
  4. Under this initiative the Department will provide an end to end e-service using SMS, e-mails to inform the taxpayers of the mismatch.

‘e-sahyog’ initiative by Income Tax Department to provide an online portal to help taxpayers resolve any mismatches in their returns without having to visit the Income Tax Department offices.

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