• Naveen Aggarwal, Partner |

Despite the current slowdown, the India story still remains real and relevant. While a large part of this is attributable to global factors, the dwindling performance of certain internal factors seems to have added to the cause. While the current worry may seem temporary, the economy needs to be careful of not getting into a vicious cycle of decline in investment and retarding growth.

The encouraging part of the story is that the government acknowledges the current demand and supply challenges triggering the fall and seem to remain undeterred in pulling the levers to revise consumption and drive growth and investment. If one was to go by the current mood in the North block and the recent Prime Ministerial consultations with industry and academia both, policy makers seem determined to fix the structural weaknesses which have been the genesis of the country’s current economic predicament.

Clear theme – driving growth and boosting consumption

On the demand side, the government seem to be on course to boost consumption and put more money in the hands of the consumers. From a supply perspective, one can expect higher investment outlay in health, education and infrastructure. One critical growth engine, which is expected to get additional fire power, will be direct tax. One can expect measures to provide additional focus on widening the tax base, ensuring compliance, easing administration and augmenting revenue.

Corporate tax rate cuts: A welcome step to put India at a competitive level amongst other global economies. That being said, if taxes payable on shareholder profit distributions are included, on an overall basis, India continues to be a high tax country. These rate cuts do not actually translate to an effectively low tax rate owing to the levy of Dividend Distribution Tax (DDT). India levies a DDT at an effective rate of 20.56 per cent on the company declaring dividends. After receiving their share of profits, post DDT, the woes of Indian resident shareholders (individuals/trusts) is aggravated by an additional levy of 10 per cent on dividends earned greater than INR10 lakhs. For foreign investors, the 20.56 per cent DDT becomes an additional cost as this tax is not creditable in most jurisdictions. There is clearly a need to relook at the DDT rates or replace it with withholding tax in order to boost investor sentiment.

Cut in individual tax rates? – There is an impending need to look at rationalising and recalibrating the existing income tax slabs to achieve the objective of a more progressive tax rate structure, in line with many developed nations. To this cause, the government should look at raising the basic exemption limit from INR2.5 lakh to INR5 lakh and re-introduce a rate of 10 per cent while re-calibrating the other slabs. With escalating costs of education and borrowed capital for home buyers etc., the government should also consider increasing the limits under Section 80C. While the challenge of limited fiscal bandwidth remains, the government needs to bite the fiscal slippage bullet to add vigour to the overall consumption in the country.

Clarity and predictability

India is seen as a pioneer in enacting legislative changes such as the introduction of Equalisation Levy (EL) in 2016 and Significant Economic Presence (SEP) in 2018. However, these provisions are still plagued with ambiguities. The SEP provisions, instead of limiting to digital transactions, suggest a broader application to physical transactions/goods. Some of the terms used in SEP have an expansive scope and the undefined revenue threshold and user base, creates uncertainty for investors. That apart, there is also duplicity of taxes with SEP, EL and software royalty operating simultaneously. The government needs to address some of these ambiguities and consciously align the domestic provisions with the ongoing progress in Organisation for Economic Co-operation and Development (OECDs) Unified Approach and the consensus which will emerge eventually.  

Dispute resolution and litigation management

The ever-burgeoning litigation pendency has shown little signs of abatement. As per the FY’19-20 receipt budget released by the Ministry of Finance, as of 31 March 2018, a total of 4,62,824 direct tax cases were pending before various appellate forums involving a tax demand of almost INR6.23 trillion. While providing a minimum tax threshold for filing appeals by the Income-tax department is expected to marginally bring down the pending litigation, radical measures may be required reduce this number. Adding rigor to clear the backlog of pendency before the Authority for Advance Ruling (AAR) and Advance Pricing Agreement (APAs’), coupled with introduction of negotiated settlement by way of mediation/conciliation is expected to go a long way in achieving this objective.

At the back of the success witnessed by the ‘Sabka Vishwas Amnesty Scheme’ introduced last year for past service tax and excise disputes, the FM may play to popular expectation and also consider introducing an immunity scheme for direct tax disputes on similar lines.

Focus on seamless experience

The government has showed its intent to ease processes by maximising e-filing and minimising taxpayers’ physical presence. However, more work is needed on ground to ensure a seamless experience where routine processes like rectification of apparent mistakes, appeal effect orders of higher authorities, processing of tax refunds and lower/nil withholding tax certificates are done within reasonable timelines.

In summary, amidst all the burden of a slowing economy, dampened job growth and private investments related challenges, the FM has her job cut out in this budget to focus her energy and the government’s resource to fix the Achilles heel of the Indian economic growth story.

 

(A version of this article appeared in The Financial Express on January 21, 2020)

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