Direct tax panel may suggest single tax on capital market investments

Direct tax panel may suggest ways to blunt the impact of US tax reforms

The committee to overhaul the 60-year-old income tax law is considering a single levy on capital market investments, a long pending demand by industry. The panel is expected to soon make a presentation to the Prime Minister’s Office.

It may consider doing away with the securities transaction tax (STT) to make the capital market attractive to investors. However, some members in the committee have argued that the STT helps track transactions better, making a case for retaining it.

“There is a broad understanding among the panel members that the dual levy on capital markets needs to go. But whether removing the STT will be the right way to go about it is being discussed,” said a person in the know.

A long-term capital gains tax of 10 per cent was imposed on equities over Rs 100,000 in the Union Budget this year, even as the STT was not removed.

The STT is a direct tax payable on the value of taxable securities transactions done through a stock exchange. It is levied at 0.1 per cent of turnover for delivery-based equity transactions, while for intra-day transactions, the STT for purchase is nil and for sale is 0.025 per cent of the turnover. The STT collection stood at Rs 111.23 billion for 2017-18, an increase of 24 per cent over 2016-17. The amount is 43 per cent higher than the Revised Estimates of Rs 77.7 billion.

The case for retaining the STT has been its simplicity of collection and assured revenue. The task force drafting the new direct tax legislation is expected to submit its report by August 31, after it was given a three-month extension beyond May 31.

The six-member committee headed by Central Board of Direct Taxes Member Arbind Modi will also try to address fears of flight of capital after the US embarked on its tax reforms. Modi was also a key author of the earlier Direct Taxes Code (DTC), now junked.

“I can assure you that industry will be very happy with the outcome of the report,” said a panel member.

The US move may lead to rationalisation in corporate tax rates even as the Union Budget 2018-19 restricted tax reduction to medium scale enterprises. “We are keen to cut rates for both the corporate and personal income tax, but for that we are examining tapping other revenue sources to be able to to reduce taxes in line with the US,” said the official.

The US corporate tax reduction from 35 per cent  to 21 per cent in the Tax Cuts and Jobs Act (TCJA) will significantly hit the IT, ITeS and  pharmaceuticals sectors in India as American companies will try to move profits back home.

The government in the latest Union Budget offered a 5 percentage point reduction in the corporation tax only for firms with an annual turnover of Rs 2.5 billion. An across-the-board reduction would have set the exchequer back by Rs 600 billion. Finance Minister Arun Jaitley had offered an across-the-board reduction in the corporation tax to 25 per cent in four years till 2019-20. 

The panel is studying income tax laws of key countries, including the US and Australia. 

“The panel, in particular, found the Sri Lankan income tax law quite simple. The neighbouring country revised its income tax law last year and it is something we are seriously looking at,” said an official.

The task force also met the International Monetary Fund and the World Bank for their recommendations.

Nine years ago, the Direct Tax Code had recommended an income-tax exemption limit of up to Rs 300,000. "We will certainly take forward the recommendations of the DTC, if they are still valid," said the official. 

 He added the tax base would have to be broadened to offer tax cuts or higher exemption limits.

However, the government wants the new direct taxes law to be different from the DTC.

The committee was constituted to look into the direct tax system prevalent in various countries, international best practices, the economic needs of the country and other related matters. 

The panel will also focus on administration and improvement in revenue targeting, data collection and tax intelligence.

It may suggest ways to bridge the gap between projections and actual results in terms of tax receipts, tax base and revenue buoyancy.

“Better analysis and gleaning of data are required. The difference between what we project at the beginning of the year and what we achieve is substantial. Direct tax targets are usually met due to arrears from previous assessment years,” said another official.

The panel will also recommend ways to better extrapolate segment-wise data, to enable analysis of which income group or business segment contributes more.

 “Once we have better data models, policymakers can make realistic assessments of what will be the revenue foregone or gained by announcing tax measures for any particular group or segment,” the person said.

The panel will also suggest ways to improve tax intelligence gathering to reduce the number of cases stuck in disputes in various courts.

SALIENT FEATURES

• In November 2017, Centre set up six-member ‘task force’ to review the Income Tax Act and draft a new direct tax law
• Panel chaired by senior Central Board of Direct Taxes official Arbind Modi
• Other members are Girish Ahuja, a chartered accountant and director on State Bank of India’s board; Rajiv Memani of consultancy EY; Mukesh Patel, a tax advocate; Mansi Kedia of think tank ICRIER, and retired Indian Revenue Service officer G C Srivastava
• In 2009, the United Progressive Alliance government had published a draft direct tax code (DTC) to simplify the legislation for individual and corporate taxpayers
• A DTC Bill was introduced in Parliament in 2010; it lapsed with dissolution of the 15th Lok Sabha