Azim Premji, chairman of India’s third-largest software services exporter Wipro, said developed nations, including the U.S., were responding to the Base Erosion and Profit Shifting (BEPS) project with barriers to free trade triggering a trade war that is detrimental to India.
‘Tax base driven’
The contribution of India to the G20-OECD BEPS project is well known, he said. Developed countries including the U.S. were responding to these changes with a view to regaining the tax base and looking for tax measures like tariffs and outsourcing tax, which serve as a barrier to free and fair trade.
“This has triggered a trend of trade wars which could be detrimental to developing countries like India. Tax administrations of various countries must collaborate better to prevent shrinking of global trade,” Mr. Premji told delegates at the 158th Income Tax Day.
The BEPS refers to corporate tax planning strategies used by multinational companies that artificially shift profits from higher tax locations to lower ones, eroding the tax base of the higher tax locations.
Mr. Premji pitched for lower tax rates in India and said transparency and accountability in collecting taxes would increase the base so that public social investments can rise to the levels required.
In the Central Government’s Budget, tax revenue constitutes about 80%-82% of its total receipts. Government’s spend on social sector, infrastructure and defence is met almost entirely out of tax collections, Mr. Premji said. “Given such high reliance on tax, it is only natural that taxpayers play a very important role in nation building.”
“Unlike a donation or philanthropy, which are three voluntary acts of altruism, tax by its very nature is an expropriation under the authority of law. This may lead to some resistance in some quarters. Resistance often arises because of perceived lack of clarity or transparency, and accountability in public spending.
“Transparency and accountability would enhance public’s awareness of their role in nation building and would eventually help in increasing the tax base,” he said.
Tax to GDP ratio in India is about 16%, including State taxes, whereas in many developed countries it is about 35%-40%. “It is imperative that India’s tax-GDP ratio also climbs substantially so that our public social investments can rise to the levels that are required,” he said.
“This includes public investment in four areas — education, health, social security, and amelioration of the problems of the neediest. It is the expansion of tax base which would enhance the Tax-GDP ratio, rather than higher rates of taxes.”
“Tax collection is best achieved by voluntary compliance. One of the prime drivers for voluntary compliance would be lower tax rates. Lower the rate, lower is the incentive to evade taxes as the cost of evasion would not be commensurate with the cost of compliance.”
“The next aspect I want to touch upon is something internal to the tax department but has an all-pervasive impact on the entire taxation system. I think there is clarion call in the country to enhance the pace of tax administrative reforms.
“Revenue productivity would be higher if this tax administration cost can be directed towards increasing the tax base rather than applied in wasteful and repetitive litigation,” he said.
As per the recent Economic Survey, the total pendency of tax cases in direct and indirect taxes is worth about ₹7.6 lakh crore, which is close to 5% of GDP, he said.
