Long overdue

The govt must hasten reforms in direct taxes administration before elections

Lowering tax outgo on companies progressively should be the way to move forward. And, the move to lower corporate tax to 25 per cent from prevailing 30 percent on companies with annual sales turnover up to Rs 500 crore was a welcome development. There’s no reason why the government should not make tax liabilities also competitive especially for micro, small and medium enterprises.

Already, finance minister Arun Jaitley has begun the exercise to reduce tax liability on MSMEs beginning 2015-16. First, the relief was provided to businesses with turnover up to Rs 50 crore. The limit was later hiked to Rs 250 crore. If the move to reduce tax liability on companies with annual turnover worth Rs 500 crore is finally done, this will cover over 99 per cent of industrial enterprises.

Finally, the call will have to be taken by Jaitley, who will present his budget proposals on February 1 ahead of Lok Sabha polls. Revenue implications may still be the defining factor. The Modi government has doled out several tax concessions while the RBI complemented the move by opening a separate window with one-time scheme to reschedule their repayments. Also, interest subventions and interest-free loans are under consideration of this government to boost MSMEs and create jobs. In this backdrop, the move to double the turnover cap for being able to attract lower 25 per cent corporate tax makes sense. In fact, if one were to consider the dividend distribution tax, minimum alternate tax, surcharges and cess, the tax liability currently stands at 33.9 per cent for domestic companies and 43.26 percent for foreign firms.

Financial Chronicle’s Wednesday edition story pointed to the possibility of slashing corporate taxes. Over the years, finance ministers have refrained themselves from tinkering with direct taxes, either personal or corporate income tax. But, nothing prevents the government of the day from making key announcements even before a general election. In fact, the government should hasten reforms in direct taxes administration without postponing further. After the retirement of Arbind Modi, the final report submission was postponed to next month-end. The reconstituted task force initially set up will have to make its recommendations on overhauling the direct tax laws and bundling them into a tax code. DTC panel’s recommendations will be key to overhaul in direct taxes, simplifying procedures and pruning the law.

Given that there was no consensus, the draft report compiled before Arbind Modi retired last September, reportedly got into a limbo. The exercise to bring about reforms in direct taxes that began during the UPA regime continued its work after its initial recommendations were consigned to the cold storage. Its take on General Anti Avoidance Rules (GAAR) and taxing long-term savings of depositors had come in for serious criticism forcing the panel to rework on its recommendations. However, there’s no denying the fact that the moribund Income Tax Act of  1961 needs an immediate recast. Jaitley will do well by outlining the roadmap for reforms in direct taxes, disbanding antique provisions and making life easy for individuals and the industry.

Now that the operation of goods and services tax (GST) has stabilised, rates revised and optimised, it’s time for government to work on direct taxes. As India’s most revered teacher, philosopher, jurist and royal advisor Chanakya said, taxes must be judicious, simple and rulers will have to collect only bare minimum from the people. Bharatiya Janata Party’s manifesto for Lok Sabha elections later this year will have to reflect this spirit in its taxation policy prescription. Given that the NDA government had banked seriously on MSMEs and foreign investments through ‘Make in India’ campaign to mobilise investments, tax reforms have to begin now.