Changes that defined the direct tax system in India
February, 27th 2014
By Prashant Khatore, Tax Partner, EY
The last decade in Indian direct tax system has seen significant changes and reforms, with some of these changes even garbing headlines at global level. The thrust of recent tax policies appear to be towards widening of tax base by reduction in tax rates, minimization of tax exemptions, rationalisation of tax provisions and enforcement of tax compliances.
The last decade was full of excitement in view of introduction of various new taxes and tax controversies of multi-million dollars. These developments were in terms of introduction of new taxes and provisions such as e-initiative of tax administration; Fringe Benefit Tax (FBT), Securities Transaction Tax (STT), Banking Cash Transaction Tax (BCTT), Direct Tax Code (DTC), General Anti-Avoidance Rules (GAAR), Dispute Resolution Panel (DRP), Advance Pricing Arrangement (APA), Safe Harbour Rules, etc., efforts to renegotiate tax treaties and retrospective amendment in tax laws overruling the court rulings.
The leading initiative to make increased use of information technology (such as e-tax returns, e-payment of taxes, digitization of TDS machinery, etc.) has done profoundly well and helped the government to facilitate efficient tax administration and plug in leakages to some extent.
With focus to prevent generation and circulation of unaccounted money, tax return filing was made compulsory for taxpayers meeting specified criteria (widely known as one-by-six criterion) in 1997; however this was scrapped in 2005 since it failed to achieve the desired objectives. In addition, various reform measures have been taken to increase tax compliances, track tax drips and apparently widen the tax base by introducing provisions relating to Annual Information Return (AIR); strengthening of withholding tax provisions; focused usage of permanent account number (PAN), etc.
During the last decade, some of the cardinal provisions introduced to widen the tax base were FBT, BCTT and STT. FBT and BCTT led to additional compliances, without corresponding increase in tax base and administrative advantages to the government and hence were abolished in 2009. STT was introduced to spur the capital market by abolition/ reduction of capital gain tax on sale of certain listed securities and payment of nominal amount of STT on such sales, with this rate being further reduced over a period of time.
Further, considering that profit linked incentives are inefficient and in past did not have significant impact on the desired objectives, the government shifted focus from various profit linked incentives to investment linked incentive. Also, various tax incentives on export sales were withdrawn by the Government.
Another significant emphasis of the last decade was towards international transactions and payments, with retrospective amendments for taxability of indirect share transfer, taxability of software, services, royalty etc. Some of these retrospective amendments caused negative impact on overall investment and business climate in India. Efforts were also made efforts to renegotiate certain tax treaties, clauses for Limitation of Benefit and Tax Information Exchange Arrangements.
The period also witnessed controversial and high pitched tax litigation, particularly on international tax issues. Another significant and widely debated initiative was introduction of DTC and GAAR, which were introduced as anti-tax avoidance measures. After lot of debate, provisions of GAAR have been rationalized and its implementation has been deferred till the year 2015.
However, as consensus on DTC provisions is not yet reached, its implementation has not yet decided. Recently, after considering the impact of certain controversial tax provisions and actions by tax authorities in some cases on overall investment and business climate, the government has formed various committees to address the concerns of the investors, which has reflected some positive perspective for taxpayers.
Further, recent introduction of APA and safe harbour rules is widely welcomed by the investors and is expected to reduce transfer pricing litigation and bring in certainty.
Overall, it can be sad that the last decade was marked with significant changes in the tax policy and litigation. The efforts are still continuing to strike the right balance between revenue collection and non-adversarial tax administration. Given that tax continues to attract significant attention of all players in the global economy, we should have a stable, fair, predictable and unambiguous tax regime to make best use of the opportunity and achieve our objective of growth.