Transforming India’s Tax System: Reforms to Drive Growth, Innovation and Sustainability – Opinions News

By Dinesh Kanabar

The World Bank has been publishing its ease of doing business rankings through 2020. Last year, it ranked India 63rd out of 190 countries, up significantly from 142nd in 2014. One thing that dragged India down was paying taxes (115th). The survey has been withdrawn, but as a fast-growing country, India needs to transform its tax system. Here are some thoughts on how to do that.

Improving Dispute Resolution: One of the most pressing issues in the Indian tax landscape is the time taken to resolve disputes. Large cases can take up to 20 years to resolve. A robust and efficient dispute resolution framework is essential for both taxpayers and the government. For taxpayers, timely resolution provides certainty, allowing businesses to plan effectively and deploy resources with confidence. For the government, it ensures timely collection of revenues.

The government had previously formed a tax code committee that made several recommendations, including an independent dispute resolution committee with quasi-judicial powers to resolve disputes early. This would reduce the burden on appellate bodies and reduce litigation. By introducing a mediation framework similar to the alternative dispute resolution mechanisms used in countries such as the US and the UK, disputes could be resolved without extensive court proceedings.

Another key measure would be to increase the authority of the advance pricing agreement program, which has been successful in preventing transfer pricing disputes. Implementing expedited processes for small and medium-sized business cases could also provide relief, as these companies often lack the resources to engage in protracted legal battles.

Improving Tax-to-GDP Ratio: India’s tax-to-GDP ratio remains a concern. At 10-11%, it is well below the global average. Developed economies like the US, UK and Germany boast ratios of 25-30%. Even emerging economies like Brazil and South Africa maintain ratios above 20%. This imbalance limits India’s ability to invest in infrastructure and places an unfair burden on taxpayers.

Improving the ratio requires broadening the tax base and improving compliance. Recent moves such as the Goods and Services Tax (GST) and using big data to detect tax evasion are positive steps. Strengthening enforcement mechanisms to reduce the large informal economy, which still accounts for almost a third of India’s GDP, will be essential.

Targeted measures to simplify GST compliance, especially for small businesses, will encourage voluntary participation in the formal economy. The government should also explore tax policy reforms that encourage digital transactions, as they are easier to monitor and regulate, and thus discourage cash, unrecorded transactions.

Simplifying tax laws: Complex tax laws have long been a deterrent for businesses and individuals. This, coupled with frequent amendments, makes compliance more difficult and expensive. However, the Finance Minister recently announced the government’s intention to rewrite tax laws to simplify them. This is a welcome step. We have sections, sub-sections, caveats, clarifications, etc. that have been building up over decades. They need to be simplified. The transition to a new tax system is welcome. Instead of exemptions and deductions, we need higher thresholds.

Alignment with global standards: In an increasingly interconnected world, India needs to be cognizant of global tax changes, especially those related to cross-border transactions. With the rise of e-commerce and technology, India faces the challenge of effectively taxing digital transactions. Its approach to cross-border taxation needs to be aligned with global standards such as the OECD Pillar 1 and Pillar 2 frameworks. Pillar 1 deals with the allocation of profits from digital and multinational businesses, while Pillar 2 sets a global minimum tax rate to prevent profits from being shifted to low-tax jurisdictions. While India has taken steps to tax digital transactions, further alignment with global norms will be crucial to avoid double taxation and prevent disputes with other nations. India should clarify its position on Pillars 1 and 2 sooner rather than later. Incorporating technology and data sharing agreements with other countries could also help Indian tax authorities identify and track digital transactions more effectively.

Leveraging technology: By leveraging technology for tax assessment, compliance and audits, India can improve the efficiency of its tax system, reduce fraud and increase revenue collection. Initiatives like impersonal assessments and widespread use of big data analytics are changing the landscape, but there is room for more innovation. Technologies that face initial implementation challenges that need to be addressed.

Advanced technologies such as AI and blockchain can be used to detect anomalies, streamline processes, and increase transparency. As businesses increasingly move online, tax administrations must continue to adopt digital tools.

Strengthening the indirect tax policy: The GST reform was a key moment in India’s tax policy. However, there are areas where the GST can be optimised, particularly in terms of balancing the tax burden across industries and ensuring that small businesses are not burdened. The GST rate structure needs to be further rationalised to make it easier for businesses to comply, and issues related to inverted duty structures need to be addressed.

In addition, sectors such as real estate, healthcare and education require special attention to contribute to inclusive growth. India also needs to continue to address compliance issues, further integrate technology into GST processes to increase transparency, reduce tax evasion and improve tax collection.

Incentives for innovation and sustainability: To use taxes as a catalyst for growth, policies must encourage innovation and sustainability. This could include offering tax incentives to industries that engage in research and development, particularly in sectors such as technology, green energy and biotechnology. Encouraging sustainable practices through tax breaks for companies that reduce carbon emissions or invest in renewable energy (RE) could also help India transition to a more environmentally friendly economy.

A reformed tax structure that supports Make in India and Start-up India initiatives will further boost growth in domestic industries, promote job creation and reduce dependence on imports. Targeted tax incentives for RE, electric vehicles and green technologies can contribute to India’s Sustainable Development Goals.

India is at a critical juncture in its growth story, and tax policy will play a key role in determining its trajectory. The next 10 years offer an opportunity to transform the tax system to support sustainable growth.

(Dinesh Kanabar is CEO of Dhruva Advisors LLP.)

Disclaimer: The views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproduction of this content without permission is prohibited.