Key Takeaways From India's Prospective Tax Reforms

In a major refurbishment of the Indian tax administration, the government has unveiled a new faceless tax assessment policy that aims to eliminate corruption and meddling by officials and other persons in a position of bureaucratic influence. A taxpayers’ charter is also in the process of being implemented to fortify the commitment of ensuring transparency in tax assessment.

The current taxpayer base in India stands at 15 million. An alarmingly low number for a country with a population of 1.3 billion. The “transparent Taxation- Honouring the Honest” platform was launched by Prime Minister Modi as a plea to the rest of the nation to come forward and pay their taxes.

The prime minister said that the implementation of tax payer’s charter and faceless assessment system would function as integral components in reestablishing the efficiency of the economy post covid. While faceless assessment and the taxpayer’s charter have already come into effect, the system of faceless appeal will come into effect by 25th September 2020. “The tax system may be turning faceless, but it promises fairness and fearlessness for taxpayers,” – to quote the prime minister himself.

The prevailing practice was that the entire process of scrutiny, appeal and notices of a taxpayer were handled by tax offices in the taxpayer’s residence. Now, a centralized computer system will pick up tax returns for scrutiny on the basis of risk parameters and mismatches. The selected tax returns will be allotted at random to a team of officers in any city. The scrutiny by these officers will be reviewed by officers at another randomly selected location. Notices will only be sent out by the central computer system. The taxpayer will be allowed to respond to them electronically without physically having to travel to a tax office to meet the local officials. The prime minister said that these steps will eradicate the custom of “jaan pehchan” and stop taxpayers from exercising undue influence on the scrutiny process.

The prime minister elaborated on the taxpayer’s charter by calling it a “fair, courteous and reasonable” system of functioning, and expects the charter to foster a habit of timely tax payments. While the total strength of people paying income tax has increased by 25 million in the country, a vast majority simply refuse to pay their due and find nefarious ways to dodge the system.

The Prime Minister pointed out that tax reform to him was a continuous process, and the current system is plagued with remnants of an archaic colonial structure. The government’s “Vivaad se viswas” scheme which was introduced earlier was an initiative to resolve maximum number of cases outside the court. The scheme helped in the swift closing of around 300,000 cases.

Since 2014, the country has experienced multiple tax reforms like GST which helped amalgamate repetitive taxes and purge the system of duplicity and complexity. A major shuffle in income tax slabs this year exempted annual salaries up to 5 lakhs of any income tax payment.

This year’s Union Budget took the step of abolishing the dividend distribution tax (DDT), thereby permitting Indian companies to share their entire amount of distributable profits with their shareholders. Earlier, companies had to pay tax at an effective rate of 20.56 percent on their distributable profits. Effectively, out of every 100 rupees in distributable profits, companies had to pay Rs 20.56 as tax, with only Rs 79.44 left for distribution to shareholders.

Further, start-ups with turnover of up to Rs 100 crore are allowed 100 percent deduction on profits for three consecutive assessment years out of ten, to encourage entrepreneurship, besides benefits like five year deferment of tax on employee stock options (ESOPs). It is safe to say that the last few years have been a magnificent phase of growth for India’s tax administration and corporate governance. Which warrants a positive reaction towards the new tax policies.

With a non-intrusive and unprejudiced tax charter, which pledges that the system of tax scrutiny will henceforth function on the basic assumption that a taxpayer is honest and trustworthy, India is implementing a model which is similar to that of countries like the United States of America, Australia, and Canada. The key takeaway remains that a full-fledged attempt to remove the arbitrariness of our system is underway.

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