MAY 09, 2024

By Pratap Singh, Pr. CIT

IT has been three good years back to back for the revenue mobilization, post covid and helped the government containing fiscal deficit and expanding the social agenda, while increasing the Capex at the same time. The sustained growth fuelled by digitalization and automation, and tax buoyancy has enabled the Government to build modern infrastructure, attracting foreign investments. Taxation landscape has been completely transformed in India, in the last few decades, particularly in the last few years. With rolling out of GST in 2017 and other tax reforms, the tax eco system is completely transformed. From an entire physical mode until early 2000s, today all tax processes are digitalized, automated and online; be it registration, tax payment, tax filing, tax refunds or grievances. Even the tax assessments and appeals have become faceless, without any kind of human interface, with the tax payer. Besides the processing is being done much faster and time taken now is reduced to 1/20th of time, taken earlier. For example the tax returns filed are processed on average within 10 days, and in many cases the same day and resultant refunds, if any, are issued expeditiously and sent to a person's bank account directly.This has created efficiency, transparency and accountability and promoted trust between a taxpayer and the tax department, which promotes, ease of doing business. Moreover, the investigation and analysis of income/taxation data can be done now, in non-intrusive ways, without visiting a tax payer or calling him to tax office. This has been possible with the help of digital technology, artificial intelligence and machine learning ( AI-ML), using block chain technologies.

2. The impact is for everyone to see. Today, we collect almost 20 Lakh Cr. in taxes with a growth rate of about 18% in the year 2023-24. In the previous two years, taxes have grown at the rate of 19% and whopping 49.54% respectively. Even the tax base has expanded phenomenally. With 8.22 crores return filers and with 56 Lakh new tax payers in the year 2023-24, Tax Department has come a long way and if we add the people in whose cases deduction of tax TDS is made, the number of tax payers works out to more than 11crores or over 8% of the population. Further,if we reduce the number of children out of population, the number of tax filers as percentage of population, works out to even higher, at about 12% of the population. This is the impact of progressive tax policies of the Government and tax reforms undertaken from 1991 onwards, more so, in the last one decade.

3. Deepening the Tax Base: The only major issue to be addressed now is deepening of tax base and bringing people from low-income bracket to higher income bracket of say, above Rs. 1 crore and above Rs. 50 Lakh and monitoring of hard to tax groups. As per latest data available, only 2.62 Lakh persons filed returns above Rs. 1 Cr. Income in the year 2022-23 and 85 Lakh people showed income of above Rs. 10 Lakhs. The figures of the financial year 2023-24 are still awaited, where this figure is likely to reach 3 Lakhs tax payers (in above Rs. 1 Cr. income) and over 1 Cr. tax payers (in above Rs. 10 Lakh income) respectively. But even this is small, as compared to economic activities taking place in bigger towns like Mumbai, Delhi, Bangalore, Gurgaon, etc. or the upcoming towns, tier 2 and tier 3 cities like Lucknow, Indore, Bhubaneshwar, Raipur, Chandigarh etc. It is expected that with better capturing of economic transactions from third parties, with the help of 360 degree profiling of taxpayers, in due course this will improve.

4. There is some criticism in some quarters that only about 3 crores people pay taxes. However, this appears to be unjustified as the figure of three crores, does not include the people in whose case TDS is already made, which is a sizeable number.For example, in case of salaried people, almost in all cases the entire amount of tax liability is deducted in the form of TDS. For example,the author pays about 12 Lakh as taxes, which is paid entirely through TDS on salary. Therefore, it may not be correct to say that only 3 crores people pay taxes.

5. Tax Certainity, Reduced Litigation: Tax certainty has been a burning topic worldwide, with a view to ensure finality in tax liability. With a view to reduce litigation, to begin with the Indian Government has itself decided not to contest any ruling by Commissioner Appeal/ITAT/High Court if the revenue involved is below 50 Lakhs/1Cr./2Cr. respectively. Further, the reopening of the past assessment matters has been made difficult and a well laid out procedure has been put on statute as per which the approval for such matters is accorded from a very senior level of the rank of Chief Commissioner of Income Tax, and that too after following the due process. Besides, a mechanism of Dispute Resolution Committee (DRC) has been brought in, which is a collegium of 3 commissioners and the small cases up to Rs. 10 Lakh additions will be referred to it and whatever it decides, no further dispute will be raised by the department. Further there is a Board for Advance Ruling (BAR) to give ruling about contentious issues in respect of non-resident tax payers, in advance. Similarly, there is an Advance Price Arrangement (APA) which is of similar nature and a non-resident person or company looking for an investment for making transactions in India can ascertain about the tax liability of a transaction beforehand. A few years back the Government also withdrew all cases relating to retrospective taxation, which were causing anxiety in foreign companies. The above actions have brought in tax certainty. The only issue needed to be addressed is the speed of decision making at BAR and APA, which in some cases is taking a longer period.

6 . Tax GDP Ratio: It is fairly accepted that 360 degrees profiling of tax payers and capturing of economic transactions from 3 rd parties, the department has been able to nudge the people, especially hard to tax groups to pay proper taxes and disclosing correct incomes in their tax return. Besides, tax education and outreach programmes have also helped the department in persuading people to pay proper taxes. However, an important dimension is tax GDP ratio, which is the percentage of GDP that the Government collects as taxes and is still small at about 18.5% including the state taxes. There have been well documented studies (Rao, 2017) which say that it should have been in the range of about 22% as of now.It is also seen that tax GDP ratio of direct taxes is about 6.5% in overall tax GDP ratio of 18.5%, which is small. It has been the experience of developed countries that as an economy grows and becomes more broad based and as per capita incomes increase, more and more taxes, to the extent of 60%-70% come from income taxes or direct taxes and lesser from indirect taxes like GST. It can also be seen from the fact that contribution of personal income tax in direct tax revenue has surpassed the corporate tax collections. Even the growth in personal Income Tax at about 24% is much higher than the growth in corporate tax which is at about 11% and the GST, which is at about 12%. India is passing through that phase now and things will become better and better in years to come.

7. Compliance Costs: Because of digitalization and automation,it is seen the cost of compliance for tax payer have been considerably reduced. Progressive steps taken by the CBDT like pre-filled return has come as a boon to the small tax payers who need not do anything and the moment he logs on the e-filing portal of the department, all basic details of their income appear as pre-filled against their PAN. Only thing he needs to do is to check these figures and submit. The Return is filed, no costs, no hassles. Besides the Tax Department collects various information through 360 degrees profiling from various third parties like banks, car companies, Sub Registrars, hospitals, stock brokers etc., which is front loaded in Form 26 AS and AIS which a person can look into before filing his return. This reduces chances of any income escaping and thus reduces litigation. The simple step by step process for payment of taxes and filing of returns is available to tax payer and he on his own can complete this process without any kind of support from any tax professional. As regard foreign investors, mechanism like BAR and APA have been very handy to give rulings, in advance about the tax liability,on a particular transaction. Besides mechanisms like Mutual Agreement Process (MAP) is also quite beneficial for foreign companies as per which competent authorities of two States or Governments sit together and decide about the taxability of particular transactions in respect of non-resident tax payer.

8. Digital Tax: Digitalization of economies and transactions have thrown its own challenges, as a company sitting abroad can do transaction of sales/purchases or for providing a few services without any kind of physical presence. How to tax profits so generated. The Tax Department brought in provisions of equalization levy in 2016 to take care of such transactions, which was initially levied on online advertisements and was later extended to sale transactions, which was termed as digital tax. There has been global consensus now in respect of taxing such profits through pillar 1 and pillar 2 solution, as per inclusive framework under BEPS. While pillar 2, which talks about global minimum tax of 15%, has already been rolled out by various foreign jurisdictions which may follow in India in due course.No consensus has yet reached on Pillar 2 (which talks about giving taxation rights to the source countries), which is likely to be reached in sometime. This issue is being looked into by G-20, OECD as also the UN, where India is contributing significantly. Today we are a rule maker rather than a rule taker, and our voice is heard and taken seriously at global tax fora.

[The views expressed are strictly personal.]