Having initiated a series of administration and legislative reforms, India is on its way to have a modern and friendly tax system, Union Finance Minister Arun Jaitley has said.
"Such a modern tax system, which is friendly to the people and businesses, would be a key to realizing the goal of a double digit growth," Jaitley said in his address at the Peterson Institute for International Economics- a think-tank.
"Tax policy and administration should incentivize compliance. They should be administered fairly, transparently, with minimum discretion with no harassment of taxpayers but also ensuring that tax evasion is dealt with firmly," Jaitley said spelling out his vision of a modern tax system.
"The tax net should be wide so that all citizens feel they are part of government. But rates should be low because taxes after all forcibly transfer money from citizens to the state," he said.
The Finance Minister said that to achieve these objectives India needed a modern, 21st century system for indirect taxes, direct taxes and tax administration.
Jaitley exuded confidence that Parliament would pass the necessary Constitution Amendment Bill for the goods and services tax (GST) in the next three weeks.
"GST is a modern tax, a consumption-based value-added tax, and a tax that avoids tax cascading. This would create a broad tax base and strengthen revenues going forward and the tax-GDP ratio," he said.
The GST will not only promote transparency and reduce corruption because of the paper trail it will create, he said.
"We aim to secure legislative passage within the next three weeks at the Center after which it will go to the states," he said.
"We have a GST council in which all the states and the Center are represented. It is a very democratic governance and voting structure," he said, adding that the GST council will take a number of decisions relating to the revenue neutral rate.
"We will aim to keep the rate competitive close to international levels and minimize exemptions," he said.
Jaitley said in the budget he had announced important corporate tax reform to reduce rates and broaden the base by eliminating exemptions.
"We are acutely conscious that capital chases destinations with the cleanest tax systems and competitive tax rates. The ASEAN average corporate tax rate is about 21-22 per cent.
Accordingly, the corporate tax rate will come down from 30 to 25 within 4 years, beginning 2016," he said.
This is being introduced next year to give companies sufficient time to adjust so as not to surprise taxpayers.
"A long standing demand of the US financial services industry for allowing foreign investments in alternative investment fund (AIF) has been introduced in the Budget," he said.
"Moreover, income of the AIF shall have a pass through status, and such income shall be taxed directly in the hands of the unit holder as if the investment was made directly in the investee company", he said.
"Similarly, the capital gains regime for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) has been rationalized, with the rental income earned by REITs having been given a 'pass through' status", he added.
To simplify procedures for domestic companies to attract foreign investments, this Budget does away with the distinction between foreign portfolio investments (FPI) and foreign direct investments (FDI) , and replace the separate 'carve-outs', which were hitherto in place, with composite caps.
"This move is expected to attract more portfolio flows in the near to medium term in debt as well as equities", the Finance Minister said.
Jaitley said capital gains of FPIs will not be subject to minimum alternate tax (MAT).
To promote offshore funds, it has been proposed that the activity carried out through an eligible fund manager located in India shall not constitute a business connection for being taxed in India.
"This clarification will help in relocation of fund managers in India, from Singapore and other such destinations", the Minister said.
The wealth tax has been abolished and replaced by taxes on the super-rich. The top personal income tax on the highest income earners in the country has also been enhanced by two percentage points, as a measure of making the tax administration more equitable and progressive.
"We have increased the exemptions limit for savings," he said.
The Finance Minister said he was "acutely aware" of concerns regarding retrospective taxation, tax harassment, unpredictability and arbitrariness in tax administration especially relating to transfer pricing.
"Let me emphasize that we are absolutely committed to a transparent and predictable tax regime. There will be no retrospective actions and we will see taxpayers as partners not as potential hostages or victims. These are not expressions of intent. We have translated them into action," he asserted.
Jaitley said even before this year's budget on retrospective amendments, he had constituted a high level Committee to ensure fair treatment of such transactions.
He also changed the Transfer Pricing method for taxation of R&D centers from Profit-Split method to cost-plus method, and introduced safe Harbour Rules with specified margins on a broad spectrum of sectors without any limit on transaction values.
The ministry has also introduced Advance Pricing Agreement (APA) provisions to give taxpayers the option to seek tax certainty in transfer pricing transactions, and thereby enhance taxpayers' confidence on Transfer Pricing Issues.
By taking several steps, he said, he has ensure more speedy redressal of tax disputes before appellate/judicial authorities.
In order to reduce litigation several measures have been taken.
The mechanism of Dispute Resolution Panels (DRP) has been put in place, the scope of Settlement Commission and Authority for Advance Rulings (AAR) has been expanded with opening of new benches of AAR.
Further, the tax authorities have been instructed to be decisive and not to file frivolous appeals in a routine manner, he said.
In this year's Budget, Jaitley said to rationalize its provisions for?greater certainty and to safeguard the interest of tax payers, the applicability of the General Anti-Avoidance Rules (GAAR) has been deferred to April 1, 2017 and all investments made till March 31, 2017 have been put out of the ambit of the GAAR provisions.
Clarifications have been provided on the meaning of 'indirect transfers' and such provisions would be applicable only if the value of assets situated in India exceeds USD 1.6 billion and comprises at least 50 per cent of the value of total assets of the foreign company.
The taxation of gains arising on transfer of a share or interest deriving directly or indirectly from assets located in India will be on proportional basis, he said.
Jaitley said the Tax Administration Reforms Commission (TARC) constituted in 2013-14 under the Chairmanship of Parthasarthy Shome has recently submitted recently a number of?recommendations to the government charting out a road-map for much-needed?structural changes in the tax administration set-up.
The recommendations are being currently examined for implementation, he said.
"But let me highlight an action that have not received sufficient attention. This year two High Court ruling went in favor of Vodafone and Shell which the government did not contest reflecting our commitment to not being adversarial," Jaitley said.