India's hidden tax crisis

Roopashi Khatri discusses the significant areas of improvement under the country’s tax regime

The term "taxation without representation" has lost its force in modern Indian democracy. India owes its independent status to acts of civil disobedience, notably Gandhiji's resistance to the British salt tax. It is the core mandate of the modern legislature to apply large tax revenues to developing public infrastructure.

Corporate taxpayers are entitled to this expectation. The tax rate in India is thirty per cent–although, for certain transactions (involving, for instance, payment of royalties), the recent financial legislation has introduced rates as high as fifty per cent. The reasonable expectation is that the government justifies these exorbitant tax rates to world-class infrastructure and a competitive business environment. In order to ensure that India attracts foreign investment and promotes domestic innovation, policy-makers must evaluate whether corporate taxpayers consider the Indian tax rates and benefits as justified (compared to the options available in other Asian jurisdictions with highly advanced public infrastructure).

For the taxpayer, available data only illustrates a small cross-section of Indian tax administration. The Statement of Revenue Foregone by the Government of India annually presents details of the tax expenditures (or the deductions from taxable income given to both corporate and individual taxpayers). However, these estimates are based on short-term impact analysis of selected samples of taxpayers. Similarly, the Economic Survey of India 2018-19 presented data about the amount of tax revenue lost due to excessive litigation by the tax authorities against decisions that courts of law ruled in favour of taxpayers. At best, if a corporate taxpayer were required to pay a specific fee from a local authority (as opposed to a general tax), they would be able to access public statements of how these fees are applied–for instance, in the improvement of agricultural lands or local theatres. This information does not illustrate how all tax revenues are spent, and it is neither possible nor desirable for a government to disclose to the public, with arithmetic exactitude, how each and every rupee of tax revenue is applied. Hence, both the elected representatives and tax authorities have an additional task of ensuring compliance and faith among taxpayers by operating in a fair, transparent and efficient manner.

To this end, the Indian tax administration has significant areas of improvement. Firstly, an immediate improvement is required in the operation of advance ruling authorities (ARAs). ARAs are departments which taxpayers may approach in order to obtain clarification and a prospective ruling about their tax liability under direct and indirect tax laws. Unlike regular tax collection proceedings, ARAs are intended to assist taxpayers in determining their correct tax liability in case a taxpayer has genuine doubts (given the complexity of the tax law). However, anecdotal evidence and published decisions support the view that the tax officials posted to ARAs conduct adversarial proceedings with a view to increase tax collection rather than genuinely assisting the taxpayer with balanced tax advice.

Secondly, the tax administration has not furnished data about its public consultation process. The annual financial bill is drafted with inputs from the Department of Revenue under the Ministry of Finance. It is desirable for the Department of Revenue to invite and publish representations from corporate taxpayers about legitimate reasons why corporate tax burden may be relaxed. In particular, the Goods and Services Council, which is a body set up under the Constitution of India, ought to publish regular minutes of public consultations in order to demonstrate that the indirect tax system produces minimal market distortions and closely coordinates with market realities.

Thirdly, both Indian tax authorities and the media must communicate a less aggressive stance on tax evasion. Unambiguous cases of tax evasion are sufficiently addressed in various domestic and international legal instruments. India is now a party to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Hence, multinational corporations have limited scope to use innovative methods to shift profits from India to low or nearly-zero tax jurisdictions (also known as tax havens or preferential tax regimes).

However, in a vast majority of cases, a large corporate taxpayer that seeks legitimate tax advantages is not 'cheating' the system, obtaining a free-ride at the expense of other taxpayers or committing any fraud. Not all cases of tax avoidance involve a mens rea on senior executives and decision-makers of companies. In fact, as long as corporate taxpayers adhere to the spirit of the law, obtaining tax advantages to a certain degree promotes healthy competitiveness in the global market. The ordinary citizen may not appreciate that tax proceedings against large companies that are of a technical nature (such as transfer pricing proceedings) merely seek to re-characterise taxable income in India and not punish such companies for willful default on their tax obligations.

The circumstances that led VG Siddhartha to take a drastic measure in ending his life are faced by many innovative and ambitious Indians. In a speech delivered on the importance of freedom in the Middle East, the President of the United States George W Bush rightly said that "in a free and just society, individuals can rise as far as their talents and hard work will take them". If the most hard-working executives resident in India are afraid of the consequences of their ambitions due to the harsh name-and-shame tactics of the tax authorities, it is time to reconsider whether India is truly a free and just society for all.

(The author is a professor of law at National Law School of India University, Bangalore and Special Legal Counsel at CounsePro Law Firm, Bangalore. The views expressed are strictly personal)

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