Moving towards a simplified tax regime
As per the Economic Survey 2016, the ratio of Indian taxpayers to voters is 4%; ideally it should be roughly 23% at existing levels of economic and political development.
The tax to GDP ratio at 16.6% is well below the emerging market economy norm of 21% and OECD average of 34%. Some of these indicators are attributable to the multiplicity of taxes, implementation challenges, high tax rates and a somewhat lack of awareness.
With the realigned political resolve and challenging environment, India is at the cusp of a radical tax transformation which would have far-reaching impact on the mindset of the Indian population and our growth trajectory.
One of the key aspects for growth is a steady regime with a moderate tax rate. The existing corporate tax rate at over 35% is significantly higher than in countries like Singapore, Malaysia and the UK. The higher tax rate in tandem with various deductions and exemptions led to protracted litigation between taxpayers and the government.
In 2014, the finance minister came out with a road map to marginalise the tax exemptions and bring down the corporate tax rates in a phased manner. This action demonstrated the resolve of the government to make the tax regime simple and easy to comply with.
The much-awaited GST will subsume a number of local and Central taxes and usher a level playing field, reduce leakage of tax credits and limit geographic concentration due to tax considerations.
This in itself has a potential of propelling the annual GDP growth by 1-2%. Tax administration has been the other focal point of debate over the years.
A peep into the tax administration system of other economies reveals that India as a nation needs to focus on predictive analysis to monitor collection and administration of taxes.
Australia has a strong tax intelligence system which is used to match the information offered by the taxpayer with different sources and identify tax evaders and non-compliance.
The US has the most comprehensive third party reporting requirements. Many countries, including Tanzania, Italy and Austria, have electronic cash registers to plug the loophole of non-recording of sales by retailers. Some of these learnings could be replicated in India as well.
Lower Tax, Ahoy
The other concern over the years has been tax leakages attributable to abuse of tax treaties and international jurisprudence. Over the last few months, the government has been working towards plugging loopholes in the domestic tax laws and moving towards a simpler tax regime.
Steps have been taken to implement the General Anti-Avoidance Rules (GAAR) as well as plugging treaty abuses by negotiating suit able amendments in various tax treaties with Mauritius, Singapore and Cyprus.
These steps will reduce treaty shopping and treaty abuse. The radical changes in the thought process and approach of the government is an indicator that India is going through a transformatory phase to improve its tax environment and rationalise its tax administration.
Through progressive tax reforms and focus on IT and data analytics, the government aims to achieve better compliance of tax procedures, ease of tax payment and better enforcement of laws.
These measures should certainly help improve tax to GDP ratio. GST and GAAR are game-changing reforms for the Indian economy, leading to an overhaul of the current tax alignment. Budget 2017 is expected to reaffirm the government’s intention towards a simplified tax regime, with lower tax rates for corporates and individuals.