Can India cross the Rubicon on long-delayed fiscal policy measures?

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The Indian government made several tax changes during its two tenures. Some of them may seem petty and thus stay away from everyday discussions outside of the corporate sector. Nevertheless, they are important for investment and growth. Some can be considered mega-measures. The extent to which these measures are effective is discussed here.

First, an important decision in terms of improving efficiency – reducing uncertainty in investment decisions – was the removal of retrospective taxation after successive governments took a decade to the detriment of the reputation of India in terms of foreign and domestic investment. Retrospective taxation makes “enforcement impossible”.

A priori knowledge

Suppose a company decides to invest in 2017, taking into account its own “risk” preferences. In 2022, five years after its investment and the start of operations, the government announces that the tax law has now been amended and that the new law will be applied from 2012, i.e. from 10 years before today. Then the risk base of the initial investment made in 2017 collapses and the company enters a realm of “uncertainty”. While the GoI’s announcement of its withdrawal of retroactive tax or its application is welcome, the precondition imposed on affected companies to first withdraw their pending lawsuits against the government may limit its success.

Second, the Alternative Minimum Tax (MAT) and Corporate Income Tax (CIT) have trended correctly, decades after the MAT was created in 1988. should MAT. Yet their econometric relationship had been negative. It was as if every time the headline corporate tax rate was reduced, the government offset the revenue by raising the MAT rate – a contradictory policy. Over the past three years, a positive relationship between CIT and MAT has emerged. This should not only improve the relationship between tax and investment, but also taxpayers’ confidence in the Indian government’s intentions.

Third, everyone remembers the global uproar of 2012 after the then government introduced its General Anti-Avoidance Rules (GAAR), a superstructure to tackle corporate tax avoidance. Gaar leaned heavily in favor of tax administration. Before a tax official could initiate an audit, it had to be approved by an approval committee composed exclusively of senior tax officials.

Subsequently, a government-appointed committee made far-reaching recommendations to streamline the application of the Gaar. In this example, he recommended that the committee include a judge and an independent tax expert. It’s just been done – albeit after a decade. Effective implementation will indicate its success.

Fourth, the Indian government has introduced a concept of “faceless assessment” which frees tax officials from summoning taxpayers for face-to-face visits. Under this program, a tax return could be sent to any part of the country to ensure the distance between the tax official and the taxpayer. This is undoubtedly a step towards the future. Unfortunately, expert reports reveal that good political intentions are circumvented, as it is difficult for large companies to refrain from attaching adequate information because it is electronic. Thus, their assessments can be dragged on. Experts point to flaws in the regime. Circumvention of political intentions by lower strata of a tax administration is not unheard of around the world, but such practices have declined elsewhere.

No need for arm’s length

Fifth, the Indian government introduced a Goods and Services Tax (GST), but too quickly. As a result, it contained “reverse” rate structures – multiple inflows had higher rates than outflows, so a business could enjoy higher credit than debit with negative implications for revenue collection. receipts. On the other hand, some important inputs are taxed outside the GST base, so no input tax credit can be given to them. The resulting higher cost is naturally passed on by producers to consumers.

The biggest limitation of the GST is its “tax return” forms. Countries that have robust TPS have “auto-complete” return forms. So, for example, after completing and filing a return form for used inputs, when the corresponding output feedback form is completed, the information from the input feedback form is automatically populated into the output feedback form. In India, entry and exit declaration forms remain independent of each other. Reflecting India’s history of tax evasion, the GST should not suffer from this endemic weakness. Until self-population is achieved, the GST cannot be considered tax reform.

Sixth, a lingering issue is the merger of the Central Board of Direct Taxes (CBDT) with the Central Board of Indirect Taxes and Customs (CBIC). Independent, they suffer from limited exchanges of information, and therefore from major information gaps on the same companies. Independence also breeds undesirable bureaucratic practices.

The Large Taxpayer Units (LTUs) which were created in 2006-07 were supposed to regularize the exchange of information, but had little success. The merger of CBDT and CBIC, strongly recommended by the GoI’s Tax Administration Reform Commission (TARC) in 2014-2015, remains a task ahead. Only a handful of comparable countries have not yet done so.

Although the introduction of long-delayed tax policy measures is to be appreciated, what is essential is proper application and implementation. We must keep hoping that India will one day cross the Rubicon.

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