Ease of doing business (EoDB) has been high on the Modi government’s agenda—India’s EoDB ranking improved dramatically from 142 in 2014 to 63 in 2019. The new taxpayer charter, which is seamless, faceless and painless, is aimed at making life easier for businesses and taxpayers, via faceless appeals and faceless assessments, giving the concept of “minimum government, maximum governance”, an entirely new dimension altogether.
The said charter, expected to have statutory status and empower citizens by not only ensuring timebound services by the Income Tax department, but also that taxpayers are treated with the dignity they deserve, fixes accountability of tax officials, who have often been accused of high handed behaviour. As per a report by Deloitte, there are over Rs 4.96 lakh crore worth of income tax claims locked in litigation, with the Income Tax Appellate Tribunal (ITAT) having 92,338 pending cases, High Courts, 38,481 cases and the Supreme Court, 6,357 cases. Tax litigations are largely the result of shoddy tax compliance and evasion, stemming from a poor tax code. Prime Minister Narendra Modi’s taxpayer charter, therefore, is a gigantic reform, to foster mutual trust between taxpayers and tax administration.
Effective from 13 August 2020, the faceless assessment scheme aims at obliterating human interface between Income tax department and taxpayer. The taxpayer is selected randomly through a system using Artificial Intelligence (AI) and data analytics. Territorial jurisdiction is also abolished. Faceless appeal facility will be applicable from 25 September 2020, to check corruption and arbitrariness. Under faceless appeal, in case of a complaint, taxpayers will have the right to appeal to the officer, selected in a random manner. No one will know who the officer is. The tax assessee also need not visit any office in person.
A team of officers will take a final decision on the appeal and taxpayers will also have the right to get it reviewed. Direct tax reforms started meaningfully after the Modi government slashed the basic corporate tax rate to 22% from 30%, in September 2019, akin to a fiscal stimulus of Rs 1.45 lakh crore. Effective tax rate with all surcharges came to 25.17%. For new manufacturing companies that start production before March 2023 and incorporated on or after 1st October 2019, corporate tax rate was reduced to 15% from 25%. Minimum alternate tax (MAT) was also lowered from 18.5% to 15%. Union Budget 2020 gave taxpayers the option to choose between the existing Income tax regime (which allows all existing tax exemptions and deductions) and a new tax regime with slashed income tax rates and new tax slabs. New tax regime offers lower rates, but equally, it removes over 70 tax exemptions, to simplify the tax structure and ease compliance burden.
Therefore, under the new tax regime, the basic exemption limit will remain Rs 2.5 lakh for all taxpayers, irrespective of their age. In a progressive move, the Modi government has retained 50 odd exemptions including standard deduction on rent, agricultural income, income from life insurance, retrenchment compensation, VRS proceeds and leave encashment on retirement, even under the new tax regime. Speaking of a wider tax net, if any government in the future has the conviction to tax agricultural income, it is the Modi government. Prime Minister Narendra Modi is a rare leader who has the courage and fortitude to do what needs to be done, without paying obeisance to political correctness.
Agricultural income is defined under Section 2(1A) of the Income Tax Act, 1961, as income earned or revenue derived from sources that include farming land, buildings on or identified with agricultural land and commercial produce from horticultural land. However, the very classification of agrarian income needs to be re-defined so that there is an end to the practice of those evading taxes, under the garb of being hapless farmers. Speaking of tax charter, the tax department shall not disclose any information provided by taxpayers to the department, unless authorized by law and the tax department shall allow every taxpayer to choose an authorised representative (AR) of his or her choice. The tax department shall also publish standards for service delivery in a periodic manner and provide a mechanism to taxpayers, for impartial and prompt disposal of complaints in a time bound manner.
Cases will be allocated on an automated random basis, with no physical interface and taxpayers need not visit the income tax office. Draft assessment could be in one city, review in another city and finalisation in an altogether new city, giving a new meaning to the concept of a transparent tax system, that PM Modi, has inked. The Union Budget 2020 took the bold step of abolishing the dividend distribution tax (DDT), thereby enabling Indian companies to share their entire distributable profits with shareholders. Earlier companies had to pay tax at an effective rate of 20.56% on their distributable profits. Effectively, out of every Rs 100 in distributable profits, companies had to pay Rs 20.56 as tax, with only Rs 79.44 left for distribution to shareholders, which is not the case any longer.
Also, enhanced surcharge, announced in the Budget earlier this year, will not apply to capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or unit of a business trust liable, to pay STT. Now, retail shareholders with a total income up to Rs 10 lakh a year will benefit the most from DDT abolition, as they no longer need to suffer the flat 20.56% imposition on their dividend receipts and they will be taxed only at their much lower, applicable slab rates.
However, those in the more than 20% tax bracket will shell out a higher effective tax on their dividends, instead of a flat 20.56%, now that DDT is gone. For example, most of the promoters of big Indian companies, who are likely to fall in the Rs 5 crore or higher income slab, will have to pay 42.74% effective tax on dividends, now that DDT is gone. But promoters should not be complaining, as India now has amongst the lowest corporate tax rates globally, thanks to PM Modi’s unprecedented and bold, taxation reforms. By implementing the new DDT mechanism, the Modi government listened to long-standing demands of Foreign Portfolio Investors (FPIs) who were disadvantaged due to their inability to avail tax credit in their home countries.
Effect of the new DDT regime would be net positive to a large pool of retail investors who do not have significant dividend income and in any case fall under lower tax slabs. There was concern that Insurance companies and other corporate investors in stocks who do not enjoy a pass-through status like mutual funds may see a dent to their incomes as they now have to pay tax on dividends at the corporate tax rate. However, there is respite to these entities too, as Section 80M benefits would be applicable to them that allows these companies to net out dividends they distribute to their shareholders, from the dividend income they receive while paying corporate tax. Foreign Portfolio Investors (FPIs) structured as corporates can now pay tax on dividends earned in India at either 20% or lower rates, specified in tax treaties inked by their home countries.
These rates can be as low as 5% in some cases. Foreign companies that receive dividends from their Indian subsidiaries will also enjoy a regime similar to corporate FPIs. NRI investors and FPIs structured as non corporates will not reap the benefit of the 20% tax rate on dividends enjoyed by other foreign investors and may need to pay taxes at their slab rates. As an added sweetener, many of them can now claim credit for taxes paid on dividends received in India when assessed for corporate tax back home, this set-off wasn’t available with the DDT. One of the less talked about but path-breaking steps by the Modi government is with respect to removal of double taxation of ESOPs, which are meant to reward the team that helps build a successful enterprise.
Hitherto, employees were taxed even for simply signing up for ESOPs as per a vesting schedule, by treating these options as perks. ESOPs should not be taxed on notional gains but only on realised gains, when an employee has realised a benefit by selling them. In other words, earlier ESOPs were taxed both at the time of allocation and then again at the time of sale, but the Modi government removed this anomaly, in an excellent move aimed at encouraging entrepreneurship, harnessing available talent pool and rewarding the outperformers. To cut a long story short, right since PM Modi’s first term in office, tremendous progress has been achieved in terms of simplification of taxes.
Reduction in tax rate from 10% to 5% for income slab between Rs 2.5-5 lakh per annum, rise in basic exemption limit from Rs 2 lakh to Rs 2.5 lakh and abolition of wealth tax, have been timely measures. Also, startups with turnover of up to Rs 100 crore are allowed 100% 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).
Last but not the least, with a non intrusive and impartial tax charter, which will henceforth work with the basic assumption that a taxpayer is honest and not otherwise, India has joined a handful of countries like the US, Australia and Canada which have such a provision in their laws. Going forward, by removing arbitrariness, the taxpayer charter of the visionary Modi government will ensure that tax authorities have as much skin in the game as honest taxpayers.
Sanju Verma is an economist, national spokesperson for the BJP and bestselling author of ‘Truth & Dare: The Modi Dynamic’. The views expressed are personal