Tax Reforms

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!

Tax Reforms

[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.

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

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.

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

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


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

By Dr V

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

Tax Reforms

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


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

By Dr V

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

Tax Reforms

[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.


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

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

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


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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

Image Source

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.


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.

By Dr V

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

Tax Reforms

[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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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
  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

By Dr V

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

Tax Reforms

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
  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

By Dr V

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

Tax Reforms

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
  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

By Dr V

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

Tax Reforms

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
  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

By Dr V

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

Tax Reforms

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’
  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’

By Dr V

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

Tax Reforms

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
  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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

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

By Dr V

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

Tax Reforms

Govt forms unit for tax administration reform

  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.

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.

By Dr V

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

Tax Reforms

Easwar Committee: Making Taxation less Taxing

  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.

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.

By Dr V

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

Tax Reforms

Government mulls Shome panel suggestions on 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.

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.

By Dr V

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

Tax Reforms

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.
  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.

By Dr V

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

Tax Reforms

Income Tax Dept sets up panel to simplify tax law

  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’.

 

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.

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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