The word ‘lockdown’, which is Collins Dictionary’s word of the year, sums up the pain that the world underwent in 2020. As a result of the pandemic-induced lockdown, India’s GDP contracted consecutively for two quarters from April to September 2020.
Some have gained from the pandemic. India’s super rich only became richer in the first half of the year — in some instances by over three times. Between January and June, 85 new Indians were added to the list of High Networth Individuals (with a net worth of more than $50 million). While this happened, the economy was on the verge of plunging into recession. Those dealing in stock exchanges also gained. It is amazing that when the GDP is contracting, some stocks are surging to phenomenal heights. The third set of gainers comprises corporate houses, Internet service providers, laptop makers and scientists engaged in medical research. The fourth set comprises manufacturers of masks and Personal Protective Equipment. Indian dealers have taken to this new business like fish to water.
But for most of the country, the pandemic led to unemployment and an increase in poverty levels. The migrant crisis revealed how thousands struggled to make ends meet. The government intervened. Pure economics dictates a big fiscal stimulus at the time of falling GDP and unemployment. But the government chose to rely more on monetary policy like credit easing and liquidity flow. Even here, there were no cuts in rates despite the fact that the real interest rate was falling. The fiscal stimulus was provided in stages and stood at merely 2% of the GDP compared to Japan’s fiscal stimulus (21% of the GDP), Brazil’s (10%) and China’s (7%).
Corporate profits have risen sharply at the expense of wages and small and medium enterprise profits. Corporate tax rates have been lowered to moderate levels but multilateral corporates have found an easy way to make big money in the time of COVID-19. Digitalisation and e-commerce have made their job simpler. The tax administration is struggling with the implementation of the equalisation levy. Non-resident e-commerce operators were brought within the scope of this levy by the Finance Act of 2000. Online sales of goods and services will be taxed at 2%. Clarity is required in implementation. The taxation of multinational corporations has become a perennial problem.
The nexus rule versus residence rule haunts tax administrations in all countries where multinational corporations operate. Digital taxation has to be amended in accordance with the UN Model Convention. There is need for India to act in sync with the OECD. Canada plans to levy new taxes on foreign technology companies to increase government revenues. Tax avoidance by global web companies has become acute because of digitalisation. In the field of indirect taxes, the government has been vigorously following whether multinational companies are passing on the benefits of tax reduction to consumers. As per the Goods and Services Tax (GST) law, any reduction in the rate of tax on the supply of goods or services has to be passed on to the consumer by way of commensurate reduction in prices. Companies are prone to benefit from GST rate reduction without passing on the benefits to the end consumers. The Anti-Profiteering Rules have to be implemented vigorously wherever there is reduction in the tax rate on any commodity or service.
Rewriting the tax law
India’s direct tax law needs to keep pace with fast-changing events. The Finance Minister announced a new scheme of faceless assessments and faceless appeals. But at the same time, the dispute resolution mechanism needs change. The International Court of Arbitration ruled that the Indian government’s move to seek taxes from Vodafone using retrospective legislation was against the fairness principle. It is necessary that a mechanism is found to negotiate a settlement through mediation and conciliation or, if necessary, arbitration in connection with tax disputes between the tax-paying companies and the Central Board of Direct Taxes.
The Income Tax Act was framed in 1961. It has been amended several times. The government constituted the Akhilesh Ranjan Task Force to rewrite the Income Tax Act. The report is with the government but has not yet been made public. Our archaic laws should be modernised and made compatible with international tax laws. If the report had been made public, we would have had the time to discuss it. There is little time now to implement the recommendations of the Committee during the Budget session. The sooner the report is made public, the better.
T.C.A. Ramanujam is a former Chief Commissioner of Income Tax. T.C.A. Sangeetha is a practising advocate of the Madras High Court