The bulk of the discussion around the economy has focussed on the ongoing pandemic and its devastating impact across the global economic system. This has ignored a silent revolution that has been an ongoing process in India over the last couple of years. Many have argued that the best strategy to recover from the present crisis lies in pushing for reforms—and it is this revolution of reforms that has gone unnoticed in one of the most challenging political economy areas of taxation. Since 2014, there has been a concentrated effort to reform the cobweb of taxes across the Indian economy that acted as a constraint on our growth.
These problems were present, not just in indirect taxes but also with regards to direct taxes. For instance, India had one of the highest corporate tax rates in the world, along with a dividend distribution tax and an additional tax if dividend incomes increased beyond a certain threshold. Taxation policies like these were repulsive to any foreign investor, while tax litigation and retrospective taxation further dissuaded investors.
The process of resolving these issues was initiated in 2014 and even though the pace of reforms in our taxation policies has been slow, we have come a long way over the last six years. The start of the corporate tax cut in 2014 finally reached its logical conclusion in September 2019 when we witnessed a new direct tax regime for corporates.
This coincided with changes in the personal income tax rates combined with the Goods and Services Tax, which completely overhauled the indirect taxation system by subsuming eight Central and state taxes. There is a possibility of yet another reform in the form of the Direct Tax Code as the committee has already submitted its report for consideration.
Reforms around taxation are difficult due to the political nature of the subject, as several special interest groups frequently attempt to thwart any reforms in this area. However, despite the political risks, the present administration has recognised the need to have a citizen-friendly taxation system. The approach has been to systematically improve the structure, procedure, forms and other related aspects to make taxpaying a rewarding and hassle-free experience.
For instance, the government has pushed extensively to ensure transparency in the assessment process with the objective of reducing red tape. The move to have a mandatory DIN is precisely to ensure that every communication of the tax department has a mandatory computer-generated unique document identification number. This is an important step for the e-assessment scheme that aims at eliminating the interface between the assessing officer and the assessees with the intention of drastically reducing red tape and tax harassment. Each of these moves are aimed at significantly clamping down on any harassment faced by taxpayers as the government recognises their role in the process of India’s development.
It is precisely this recognition that pushed the government to introduce a documented set of rights of taxpayers in the form of a taxpayer charter. The charter will formally recognise the rights of India’s stakeholders that will be enforceable, thereby creating a new relationship built on trust and mutual respect between the taxpayer and the tax department (or the government). This marks a significant shift in the approach of the government towards direct taxes and taxpayers in general.
This shift is consistent with the strong push by the government to improve both the ease of doing business and the ease of living as the tax department is constantly tweaking systems to improve ease of paying taxes. This started with the process of introducing pre-filled tax forms, which significantly lowered the time and costs for several small tax filers while simultaneously reducing errors involved in the process. Recently, the government has further simplified the process of allotment of Permanent Account Number for filing taxes on near to real time basis for those applicants who have a valid Aadhaar number. The process instantly issues an electronic PAN free of cost.
These incremental reforms, whether in the structure of tax rates or in the process, indicate a strong push towards altering the political economy of taxation in India as they put the need to reward taxpayers at the centre of these changes. It is this change in mindset that is far more significant as it paves the way for further tweaks to systematically overhaul the government’s approach towards resource mobilisation.
That this approach has yielded results is well reflected in investors reposing their faith in the Indian economy. We have achieved record high levels of investments between 2014-19. Even during the pandemic, where companies are struggling to fund their operations, several of them have made fresh commitments to invest into India over the next few years. To be able to attract the kind of investments India has during the pandemic signals the extent of medium-term economic potential that is being recognised by investors across the world. These bright prospects are a direct outcome of strong macroeconomic fundamentals combined with extensive reforms across various areas—with taxation being one of the most critical amongst them.
Karan Bhasin
New Delhi-based economist
(karanbhasin95@gmail.com)