BackOpinion | This is the chance for India to reclaim some lost ground
New measures for avoiding tax disputes could be considered and existing ones improved
PremiumThe first budget of the decade arrives under challenging circumstances. The backdrop for the Union budget is vastly different from the last one. First, the US-China trade war, which escalated last year, continues to impact the global economy. Global supply chains will be tweaked, perhaps permanently. There is an opportunity for India to reclaim some of the lost ground here. Also, the World Trade Organization (WTO) Dispute Settlement Body has determined several export incentive schemes in the current foreign trade policy (FTP) to be ultra vires India’s WTO commitments.
Another important factor is the economic slowdown. The government acutely recognizes the need for affirmative action to push investments and economic activity. Tax revenue collections have been sluggish, in fact, far below expectations. This is partially because of the slowdown, besides an aggressive reduction in both direct and indirect tax rates over the last few years. A litigation dispute resolution scheme (LDRS), covering several erstwhile indirect taxes, got subsumed in the goods and services tax (GST), which was visionary and has been a success. Here is what can be expected in this background:
Direct Taxes
The July 2019 Union budget was followed by what one may call an incremental addendum in September 2019. Corporate tax rates were reduced by effectively one-third and an even more competitive tax rate for new companies proposing to engage in manufacturing, was notified. This was done primarily to be competitive in the international supply chains, attract investments and promote economic activity.
Personal tax rates
There is a popular demand to reduce personal income tax rates purportedly to increase disposable income and boost demand. It would be interesting to see whether the government acquiesces, given the already stretched financials that it is grappling with.
Dispute resolution and certainty
Increasingly, there is merit in seeking affirmative action in resolving disputes and providing certainty. The experience on the indirect taxes dispute resolution scheme has been pleasant. The total amount involved in litigation at the end of 2017-18, for both direct and indirect taxes, amounted to 4.5% of the GDP. 3.5% of the GDP was stuck in litigation for corporate taxes alone. New measures for avoiding tax disputes could be considered and existing ones could be improved upon. The mechanism of Authority for Advance Rulings (AAR) in India, with more than 400 cases pending resolution, has had limited success in reducing litigation. This is due to structural and administrative reasons that needs plugging. The advance pricing agreements (APA) have been successful as a means of minimizing litigation. The department has already signed 300 APAs, despite it being a complex exercise. Capacity building for both AARs and APAs, supplemented by new mechanisms like private ruling and mediation will help taxpayers immensely.
Uday Pimprikar is a tax partner and national leader of indirect tax services at EY India. Views expressed are personal.
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