Modi government likely to revamp direct taxes to improve ease of doing business
January, 28th 2016
The Narendra Modi government, which has pledged a predictable and non-adversarial tax regime, is likely to begin a sweeping revamp of direct taxes in the Budget that Finance Minister Arun Jaitley will present next month. Simplification and rationalisation will be the two themes driving the overhaul, which is aimed at improving ease of doing business and also creating a more positive perception of India's tax environment, long regarded as hostile and therefore inimical to them by investors.
The government wants to change the perception about India's tax environment as it seeks to drum up private investment and bolster growth. "The attempt will be to remove the clutter and simplify the tax law," said a government official aware of the matter. The directive from top policymakers is clear — make tax laws less complex.
The government has already spelt out this vision with its plan for corporate tax, which is to scrap the plethora of exemptions and lower the levy. That will make life simpler for companies and the government, making compliance easier, boosting business and driving up revenue. In his last Budget, Jaitley had said the government wants to lower the corporate tax rate to 25% over the next four years. The Budget will carry the process forward besides taking on board some of the suggestions made by the Justice RV Easwar committee on simplifying tax laws. The panel has been asked to give its first set of recommendations by January end so that these can be taken up in this year's Budget.
The panel is expected to touch upon many areas, including defining royalties and fees for technical services. It's also looking at 'association of persons' in the case of consortiums where there is no profit besides bringing clarity to the areas of business revenue and eligible expenses.
Also on the agenda are streamlining the minimum alternate tax (MAT) regime, the subject of many disputes, and taxation of dividends. Companies now have to pay a dividend distribution tax on payouts, seen as double taxation of profit. One idea is to tax dividends paid to an individual at the person's marginal tax rate.
A number of changes are also expected in the transfer pricing regime to mandate that companies enhance their documentation, and redefining the term 'permanent establishment', which has been at the core of several legal battles. "Many of these issues have to be taken up in line with international commitments," the official said. A separate panel within the Central Board of Direct Taxes is identifying provisions that will be taken up in the upcoming Budget as part of India's commitment to the OECD Base Erosion and Profit Sharing project.
ET view: Look at the direct taxes code, again
A simple and clean direct tax regime will improve compliance and help widen the base. It makes sense for the government to stick to the principles enshrined in the Original Direct Taxes Code of keeping tax rates low and removing exemptions. It should accept recommendations such as the exempt-exempt-tax (EET) method for savings as the principle is sound: no saving asset would be taxed, but only income from the asset would be taxed. Low direct tax rates coupled with the goods and services tax will bring in equity in the country's tax policy.