No push for tax administration reforms in this budget
The tax policy announcements in the Budget 2017 deserve to be praised. However, policy cannot work without administration.analysis Updated: Feb 03, 2017 00:01 IST
A nation’s budget should ideally inspire. This one was, instead, workman like — overall, perspicacious in policy aspects but lacking in administration reform. I will take up only the fiscal policy followed by tax policy and administration. To begin, while the Fiscal Responsibility and Budget Management Review committee recommended that fiscal deficit should be 3 % of GDP, government has fixed it at 3.2 % for 2017-18. This may seem amiss; however, it reflects capital expenditure rather than revenue (consumption) expenditure of the government. Indeed, revenue deficit is projected to decline to 1.9 % (though FRBM would allow 2 %), from 2.1 % in 2016-17. This is fine in an environment of lacklustre private investment.
Concerning the business sector, the prominent salutary measure is reduction in the corporate income tax (CIT) rate to 25 % for 96 % of return filing companies. This was direly needed for investment from the micro, small and medium enterprises (MSME) sector. The other 4 % larger companies already enjoy lower effective tax rates but bringing down their headline tax rate should follow from an international competitiveness perspective. Interestingly, the annual revenue loss due to finance minister’s (FM) measure is only Rs ,7200 crore—a minuscule % of total tax or expenditure. Thus the intelligent follow-up policy would be to make this sector pay their legitimate tax share by expanding the number of MSME taxpayers which FM assured.
Corporations have to pay the higher of CIT and Minimum Alternate Tax (MAT). MAT’s unanticipated extensions to more productive activities have exacerbated uncertainty in business decisions but, if unperturbed, it is a good tax that enhances equity among taxpayers. The extension of MAT loss carry-over from 10 to 15 years is a rational measure for evening out tax payments and improving MAT’s acceptability. On the other hand, the change in long-term capital gains definition from three to two years is arbitrary for, indeed, the change differentiates income and capital gains even more starkly while ideally they should not be separated.
In international taxation, removing taxation of indirect transfers that take place abroad of foreign portfolio investors on India-based assets is welcome. It was long overdue and reflected a flaw in the tax structure. Next, the Indian tax administration’s excessive transfer pricing (TP) audit practices is internationally known. Thus, limiting transfer pricing audit of domestic companies to only those with profit-linked deductions should contain an explosion of domestic TP audit cases. However, a gross omission was any mention of officer training for the General Anti-Avoidance Rule ( GAAR) application from April 1 given the adverse experience with TP application.
Moving to individual income tax, it is not clear why the tax rate was reduced from 10% to 5% for the Rs 2.5 to 5 lakh bracket. Just an inflation adjustment would have corrected for fiscal drag. The FM read out long calculations of tax-saving benefits within this group reflecting routine exercises of the income tax department. It appeared more an early pre-election device than being based on economic rationale. While the 10 % surcharge introduced for the Rs 50 lakh to 1 crore bracket could be justified for equity, it unnecessarily distorts the income tax structure for a small revenue gain. Of course surcharge revenues are not shared with states.
Now to tax administration. The World Bank continues to rank India at 172 in the ease of paying taxes among 190 countries. The budget proposals will not improve this since they propose little concrete tax administration reform despite the Tax Administration Reform Commission’s (TARC) deep recommendations. Caution, lest the group that invented the term ‘tax terrorism” sink into it themselves, the FM’s single sentence, “I would like to assure everyone that honest, tax-compliant person would be treated with dignity and courtesy” fails to reassure. The one-page form proposed for individuals with taxable income less than Rs 5 lakh (other than business income) is good on paper. By international standards, however, individual tax return forms continue to be complex, often not comprehensible, and sometimes perhaps above the law—for example where asking for information on financial and real assets in a form for income tax when there is no tax on wealth. This is where lack of conviction for fundamental tax administration reform reveals itself.
On a salient note, the FM frankly reported on GST preparations—albeit a poorly designed tax that does not stand up to international scrutiny—thus indicating what the remaining tasks comprise. When exactly those tasks would be successfully completed was not clear though the indication that government will “reach out” to GST taxpayers from April 1 was welcome—though, if GST is to be implemented from July 1, such a stakeholder consultation period would be utterly short by international standards.
The tax policy announcements and the overall fiscal framework cannot be heavily faulted; indeed, many aspects should be praised. However, tax policy is only one palm. For a namaste, the other palm—tax administration—has to be offered. This part is missing for the FM did not convincingly delineate it. Successful demonetisation—other than, as implemented, its deeply harmful effects on the poor—is certainly good for reducing tax evasion. But, again, the quid pro quo has to be ensuring and elaborating on the design of tax administrator behaviour. It is not just putting a distance between taxpayer and tax administrator through policy for, ultimately, that would merely skirt the crux of the problem. The FM expressed preoccupation with lagging private investment. It will not improve much without fundamental administration reform.
Parthasarathi Shome is Chairman, International Tax Research and Analysis Foundation, Bangalore.
The views expressed are personal