DECEMBER 02, 2015

By TIOL Edit Team

INDIA'S virtual stagnation in the lower rungs of global rankings in ease of paying taxes (PT) continues to irk us in November every year when the World Bank & PwC jointly release their annual PT Report.

The latest PT2016 report shows that India's Overall PT ranking has declined to 157th from 156th in previous report. India occupied 158th slot in PT2014. The country touched a low of 169th in PT2009. There has thus been no significant change in the overall ranking since the start of this annual exercise ten years back.

This is notwithstanding several tax initiatives launched in dribs and drabs over the decade. The impact of these efforts apparently gets offset by the changes in tariff and regulations, coupled with a few toppings such as surcharge and cess.

We hope the launch of good and service tax (GST) and finalization of road map for phased reduction in taxes and pruning of incentives under Income Tax Act (ITA) in 2016 would herald notable jump in India's PT ranking and ease of doing business (EODB) ranking. PT is one of the 11 indicators used by the World Bank in working out global EODB rankings.

The Finance Ministry should capitalize on GST and IT reforms roadmap by setting timelines to attain significant rise in the ranking for ease of paying taxes. It might like to take inspiration from Tax Administration Reform Commission (TARC), which submitted four reports to Modi Government.

Referring to India's low ranking among 185 countries in the ease of paying taxes, TARC stated: "This is a stark indication of the gap between where we are and where we ought to be. The big question is how the tax administration can be transformed to radically improve the ranking if India is to emerge even among the top 50, with a view to improving its ranking steadily thereafter."

The Government should accept this target mooted by TARC in its first report released in June 2014. The Finance Ministry should take a definite and positive call on TARC's package of reforms.

It also needs to bring clarity to the issue of direct taxes code (DTC) that has been dragged on since 2009. The hope for revival of DTC has arisen from the Ministry's decision in October to constitute an experts' committee to simplify ITA.

The Committee's terms of reference (ToR) include identifying ITA provisions that are leading to litigation due to different interpretations. It also has to zero in on provisions that are impacting EODB. ToR does not provide for revising DTC bill as a replacement for archaic and complex ITA.

This should, however, not deter the panel from revising and articulating the good initiatives incorporated in DTC bill, which lapsed in Parliament last year following re-constitution of Lok Sabha after the general elections.

Finance Minister Arun Jaitley should bring clarity to this vital and delayed reform. In his Budget speech for 2015-16, he stated, "Enactment of a Direct Tax Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among very few aspects of the DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code as it exists today."

He also ought to prod Income Tax Department (ITD) to scale up its pilot project for e-compliance that was inaugurated in October this year. Named e-Sahyog, the pilot project has been conceived to reduce the need for the taxpayer to physically appear before tax authorities.

The e-Sahyog's objective is to provide an online mechanism to resolve mismatches in Income-tax returns of those assesses whose returns have been selected for scrutiny, without visiting the Income Tax Office.

Simplification of compliance with issues arising after e-filing of the returns is a neglected area. It deserves much more attention to reduce the compliance cost for both the tax payer and ITD.

The Government has to convert its good intent to usher in a simple, stable and reliable taxation framework into action by firing all cylinders on the tax reforms front.

And the simplest way to bridge the gap between the talk and the action is to eschew the urge to make annual changes in both direct and direct taxes. It must renounce once for all the malpractice of additional resource mobilization by levying surcharge and cess. It should merge all surcharge and cess into existing taxes, if it does not want to scrap them as such and the forgo revenue.

A simple and stable tax framework can offer loads of benefits. First, it facilitates higher revenue through improved compliance by existing tax payers and by bringing new taxpayers especially teeming small retailers who avoid paying taxes partly due to complicated tax system.

Second, it facilitates ease of doing business and thus attracts investments, which are essential for mopping up higher tax revenue.

Third, tax buoyancy and robust growth form a strong platform on which employment generation can be promoted on sustainable bases.

As put by a reputed consultant Richard Bird in a paper captioned 'Smart Tax Administration' published in a World Bank publication in October 2010, "the 'smartest' development policy needs to be underpinned by 'smart' tax policy."