In the right direction

The task force on the Direct Tax Code (DTC) submitted its report to Finance Minister Nirmala Sitharaman on Monday. The government has not yet given any timeframe for releasing the report (it should put it in the public domain soon to enable an informed debate), but some of the recommendations have been reported, including by this newspaper, and are in the right direction. For instance, the report has proposed changes in personal tax slabs to benefit the middle and upper-middle class Indians, though the extent of the reduction and the status of exemptions are not clear. Further, the panel has reportedly recommended reducing the corporate tax rate to 25 per cent for both domestic and foreign companies. Over 99 per cent of domestic firms are already at this level and the rate is likely to be reduced for the rest in the coming years. Therefore, there should not be any difficulty in accepting this recommendation. The reduction in the tax rate for foreign firms will help bring more investment and boost growth in the medium to long run. Some of the foreign firms may, however, wait for the fine print as the panel has proposed a branch profits tax on the amount repatriated to their foreign partners.

However, the most significant suggestions are in the area of tax disputes. The task force has suggested replacing assessing officers with assessment units. This is in addition to the idea of faceless scrutiny of cases picked centrally and allocated randomly. Also, taxpayers may be allowed to go for negotiated settlement through a collegium of commissioners. This will help reduce cases of harassment by tax officials and make life easier for taxpayers. Further, the report has recommended changing the rules for reopening assessment cases. It should be done on the basis of pre-defined criteria. All this will help reduce litigation and is likely to aid both the government and taxpayers. Currently, there are tax-related disputes worth about Rs 6 trillion. It is no secret that the Income-Tax Department is the largest tax litigant, and the success rate is pretty low. Often, arbitrary or irrational demands are raised by assessing officers, because they must meet unrealistic targets, on which hinges their performance appraisal. This results in the taxpayer invariably filing an appeal. So any step to reduce litigation must be welcomed. 

Overall, the task force has made all the right noises. Fundamentally, there is no dispute that tax rates need to be brought down for both individuals and firms. However, what would perhaps be worth debating at this stage is whether the current fiscal situation will allow the government to move in this direction. In order to make a significant difference, the tax department would need to work on compliance. Irrespective of what the government decides to do with the recommendations of the task force, the tax department should build capabilities through better use of technology to check evasion. It is important to bring more people in the tax net to increase revenue. At the broader level, the task force has given an opportunity to the government to rewrite direct tax laws, and it should aim to reduce rates, broaden the tax base, remove distortions in the system, and contain the possibility of disputes.