Taxes are intrinsically linked to life and their inevitability is reinforced by Benjamin Franklin’s famous quote: In this world, nothing can be said to be certain, except death and taxes. In today’s fast-changing business environment, the way taxes and policies surrounding them are implemented plays a crucial role in determining the direction of the economy. Realising the significance of embracing the change, the government has, of late, taken several steps towards the reform of the taxation system in India. Will the Budget 2020-21 take the process forward?
By Neha Sharma
Economic growth is a key objective for governments across the world. Taxes are critical as they fund government spending including spending on infrastructure, education, employment, etc. Tax policies have a significant impact on society as a whole. In fact, the lifeblood of a country’s continued growth, inclusive well-being, and infrastructural development is its tax system.
Tax structure: Need for a re-look
In a fast-changing business environment and technology, the way taxes and policies surrounding them, are implemented makes a whole lot of difference. The IT revolution which has been underway since the 1980s has transformed the way people work and live their lives including more recently the growth of the sharing economy and use of on-line platforms. It has created massive changes in the world of business – with the emergence of major global technology firms. Then, integration of economies by liberal foreign investment regimes, expansion of trade etc., social media platforms, B2B platforms, B2C platforms has enabled another set of major changes in the business environment.
In view of changing times, if a particular tax law, has run out of its utility or a newer law is better suited, it’s time to embrace the change. And at the same time, it is important to remember that every new law has its nascent stages and evolves slowly over time. Implementation and teething issues with respect to a new law can sometimes make one overlook the real long term benefits of such a new law. In a country like India with vast geographic bounds and the second-highest population in the whole world – the impact of introducing and implementing a new tax can be far-reaching for all –be it economy, government or the people.
GST: Transforming India
The introduction of Goods and Services Tax (‘GST’) in India from 1 July 2017 is a landmark tax reform with significant implications for Indian companies’ tax compliance. GST is a single, comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India, right from the manufacturer to the consumer. One indirect tax for the whole nation, it has virtually transformed the taxation structure, making the country one unified common market.
Prior to the GST’s introduction, India had an extremely complex indirect tax structure with multiple Central and State levies such as excise duties on manufacture, taxes on inter-state and intra-state sale of goods (where every State had different VAT laws) and service tax on the provision of services, entry tax on imports into States, etc. These taxes were also administered by different authorities.
At the same time, rates of tax on sales of goods and the exemptions were not common across the country. All these taxes have now been subsumed into a GST levied on the event of the ‘supply’ of goods or services. The country has embraced a dual GST model where all supplies are subject to Central GST and State GST. It also applies to supplies between branches of the same entity located in two different States. This paradigm shift also required a change in the Indian Constitution to re-align the taxation powers of the Central and State Governments. One of the biggest challenges for the introduction of GST was to achieve consensus between the Centre and States since the latter had significant concerns about the loss of fiscal autonomy and loss of revenue (due to the shift from origin-based to the consumption-based tax system for inter-state sales of goods).
Mitigating compliance woes
The Government has been undertaking several outreach programs to educate taxpayers and tax administrators on the new legislation. These include training programs, conferences, issuing clarifications, and setting up taxpayer helpdesks. Being a new law, there are several aspects requiring clarity and the Government is responding quickly to the queries and concerns of taxpayers. As a unique initiative, a dedicated Twitter handle was set up to provide instant responses to taxpayer tweets which are later formally validated and issued as FAQs.