Budget 2020: In October 2019, the government announced stimulus package to help spur investments to fight the economic slowdown. This included slashing of corporate tax rates from base rate of 30 per cent to 22 per cent for all companies if certain conditions were satisfied. Lower tax rate of 15 per cent was announced for newly set up companies which start manufacturing on or before 31 March 2023. While these measures have been lauded, they have failed to result in significant increased investment. The major reason for this lack lustre response is low level of consumption and corresponding demand to provide confidence for increased investment commitments. While reduction in tax rates for individuals may have some positive impact on increase in consumption, this may not be sufficient. Businesses would need to focus on increasing exports to compensate for slack domestic consumption.
However, Indian exports have remained low for a variety of reasons. A significant amount of red tape and hurdles exist for exports. These need to be urgently identified and difficulties removed. Government could provide incentives by way of cost reductions on inputs for exports. Setting up of small industries face significant compliance and regulatory hurdles at ground level. The sectors and specific geographical areas need to be identified, processes be streamlined and made transparent for hassle free trade, commerce and industrial activities. Though India has made huge strides in improving its ranking in 'ease of doing business', a lot more needs to be done on the ground level to rouse the animal spirit for taking risks.
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While tax incentives have a role to play, the impact of the incentives is dampened by the difficulties faced in tax administration. Availing of tax incentives could result in litigation as creative structures may be used to claim incentives and in a bid to protect the tax base that tax officers will deny them. Trust and partnership need to be fostered between tax administration and tax payers to give desired result of tax concessions.
A major reform required is providing stability and certainty to taxation regime. Changes announced every year cause businesses to keep restructuring to benefit from newer schemes which may also lead to litigation. Once tax rates and schemes are announced, they should be allowed to stabilise and run successfully for at least 3 years. Changes should be limited to providing clarifications or for removing difficulties in implementation. Tax compliance needs to be made easy, hassle free and transparent.
In the infrastructure sector, equipment procurement and construction contracts usually require a consortium of operators to come together. This may expose them to be taxed as association of persons which leads to significant uncertainties and litigation. There needs to be a separate tax regime, recognising the special need of this sector to ensure tax certainty and ability to claim treaty benefits where applicable.
Similarly, regulatory compliances also need to be easy and transparent. Land acquisition, land leases and license processes should be stream lined. Stamp duty on these transactions is a major source of pain point. The discretionary power given to adjudicating officer for levy of stamp duty needs to be removed and stamp duties should be reduced.
Agro based industries should be given infrastructure status to provide impetus to this industry with far reaching benefits to remote villages. A significant income generating activity of agriculture remains outside the tax net. While small farmers can be kept outside the tax net, there is a good case to tax a section of farmers. Farmers who travel abroad, have expensive cars and financial investment above a certain threshold can be taxed on their agricultural income at the lowest tax rate, thereby bringing them within the formal economy.
(The author is Head of International Taxation at Cyril Amarchand Mangaldas)
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