As 2009 comes to a close, India Inc and individual taxpayers alike would want to reflect on the overall thrust and direction and implementation of tax policy initiatives in India in this decade, begins Sudhir Kapadia, Tax Partner with Ernst & Young, India. “Tax policy, the lost decade?” he wonders, though, in the course of a recent email interaction with Business Line.
Excerpts from a brief interview, in which Kapadia speaks about direct and indirect taxes.
Direct taxes.
As is well-known the current income tax law is a code written in 1961 to replace the earlier code of 1922. With the efflux of time and increasing sophistication of business transactions, the current Act has witnessed thousands of amendments over a period of time and there is a wide consensus about the lack of simplicity and clarity on many contentious tax issues in India today.
It was about a decade ago that Kelkar Committee recommended benign tax rates with a simple code without the clutter of various tax exemptions and deductions. For various reasons, the Kelkar Committee has never been implemented in its fullest form and shape. For example, we still have surcharges of various ilk on the basic corporate tax rate of 30 per cent despite the fact that the ostensible reason for imposition of these surcharges seem to have outlived their relevance.
Whilst an attempt has been made to rationalise and provide for “sunset” timelines for expiry of some existing tax holidays, our tax policy on tax holidays appears to be ambivalent. For instance, the tax policy on SEZ (special economic zone) has been singularly uncertain and at divergence from the SEZ policy.
Of course, the highlight of the decade will surely be the introduction of the Direct Taxes Code (DTC) which is a bold attempt to simplify the tax law and offer greater certainty to the taxpayers. Much has been said and written on the DTC and Government has indicated its readiness to revisit several critical areas of the DTC in view of feedback received from industry and professionals.
With the benefit of hindsight perhaps the stakeholders could have been taken into confidence and their views solicited much earlier before the draft code was written and presented to the public. This would have enabled a healthy debate around the direction of tax policy and new concepts sought to be introduced like the Gross Assets Tax, for example, before the actual drafting of the law.
Indirect taxes.
The fact that the Indian economy has been plagued with multiple indirect taxes leading to inefficiency, cascading impact of taxation and higher cost to consumer is a well-documented feature.
Whilst the introduction of the Value Added Tax (VAT) to replace the state-level Sales Tax was a laudable initiative, the fact that separate laws govern sale of goods and sale of services (through the Services Tax Act) and the obvious loss to input credits whether goods are used as inputs in the service sector and vice-versa means that inefficiencies continue to prevail in the area of cascading indirect taxes.
In the light of this, the introduction of the Goods and Services Tax (GST) concept is perhaps the most significant tax reform introduced in independent India. To the extent the GST concept aims to converge and harmonise all indirect taxes under one group and more importantly ensure availability of input tax credits against output tax credits in respect of inputs in the value chain, it is a welcome departure from the current system of multiple indirect taxes being levied on value chain of the business.
The challenge which policy makers face under the GST concept is of course to refrain from incorporating too many exemption categories of goods or services as this would result in loss of input tax credits where a business is engaged in providing an exempt good or service.
For an eternal optimist, the twin implementation of a sensible DTC and GST in India should usher in much-awaited simplicity and certainty for the hapless taxpayer in India. If this promise does not get fulfilled, if nothing else, we will continue to have gainful employment of tax administrators and tax professionals alike.
