Why next-generation tax reforms must top to-do list for Modi 2.0 government

Following the Indian government's decision to implement a national Goods and Services Tax (GST) and to commence a review the extant Direct Tax Code, a "next generation" of tax reforms is a logical next step for the next government.

As the next government considers what the next five years of the reform agenda should look like, tax reforms will, inevitably, play a large role as the government grapples with the need to mobilize greater revenues to fund public expenditure and new social programs. Therefore, the government will need to articulate the next generation of tax reforms.

The GST, which underwent teething challenges due to inadequate planning on resources as well as technical glitches, has reached a status quo. The next-gen reforms in the area of GST will require harmonization of rates, from the present 5-slab structure to a 3-slab, if not a 2-slab structure. This could mean that the revenue neutral rate could settle at between 15-16 percent covering roughly 95 percent of goods and services.

Dispute resolution in the area of GST will also dominate the tax reforms agenda. This could mean functioning of the new appellate forums and an administrative stance to not repeat the mistakes of the past, wherein the government emerged as the most significant litigator. Subsuming transaction costs, particularly stamp duties and other levies, which are presently administered by the state government, within the GST net would be a significant step ahead. Discussions at the GST Council level to bring in the petroleum goods and other transaction levies such as stamp duties will move forward as India inches closer to the global GST model.

On the Direct Tax front, the most sought-after development could be the much-awaited Direct Tax Code. Given that the review and the drafting committee has had the benefit of a third extension, the design and content aspects could well align with the modern economic realities of the country. This could mean not just consolidation of the existing provision, which has become complex and unwieldy but incorporating new ideas on tax policy stance such as phase-out of tax holidays etc., as well as modern administrative practices.

At a broader policy level, widening of the tax base would dominate the new code design aspects. This could well mean simplification of structure for individual and small/micro enterprises, together with a robust risk-based criterion for selecting cases, which would be audited or scrutinized. The concept of taxpayer services is likely to dominate the new Direct Tax Code recognizing that the medium and large taxpayers make a material contribution and have been reeling under the pressure of over-enthusiastic tax auditors. This could mean addressing the empowerment of tax officials such that a balance is struck between ensuring the duty of tax compliance as well as serving the taxpayer as a customer.

India has signaled its intention in global forums such as the OECD, G20 and the UN expressing its desire to implement strict source-based taxation. Though, much of the intent is work-in-progress at an advanced stage, translating them into policy will take place as part of the new Code exercise. This will also cover the taxation of multinational enterprises with cross-border transactions, and new methods of taxation of evolving business models using technology. Though India’s stance may be at variance to advanced economies, a clear shift is visible to emerging economies which are high consumer/service recipient countries. This stance is visible in the imposition of the tax such as equalization levy and amendments to domestic law by way of ‘significant economic presence’ concept for digital and non-digital business models.

Whereas, some of these measures could mean double-taxation in the hands of multinational enterprises, it is an opportune time for India to develop a mechanism for settling disputes outside of the court system. Given that India has expressed a strong reservation to adopt mandatory arbitration, focus perhaps could be on other alternate mechanisms such as mediation, compromise/settlement etc. This will be truly reformative given the impact of tax disputes it has had on the country’s index for ‘ease of doing business’ in India. The choked court system and quantum of tax disputes could well mean a settlement mechanism for the past cases as well.

Finally, given the benefits of digitization, the government is reaping and the 2019 interim budget announcements, paperless and faceless tax administration motto shall move by leaps and bounds. In the final analysis, tax reforms agenda will dominate the debate as to the need for public expenditure and social program shall dominate the thinking process, which could be fulfilled only with greater mobilization of government revenues, making the reforms agenda as the guiding philosophy.