Modi govt scorecard: Good work on GST, dragging on direct taxes code

While the govt has widened the tax base and provided substantial relief to MSMEs, its U-turn on DTC means the code will not be implemented before the next govt comes to power

After a decade of deliberations by the previous governments, the Narendra Modi regime took a historic step to introduce the goods and services tax (GST) on July 1, 2017. However, it faltered on the direct tax reforms, even as it did take some substantive steps to reduce tax rates, increase the threshold limit and reduce so-called tax terrorism. 

The steps were also quite far reaching in terms of the impact on the targeted people. Now, a person with even a gross annual income of Rs 10 lakh a year can escape income tax through saving instruments if his taxable income comes to Rs five lakh, though this would come into force next year.

However, such taxpayers will still need to file their tax returns, unless their income is below the taxable threshold of Rs 2.5 lakh. 

In the previous government, 10 per cent tax rate used to be levied on income over Rs two lakh.  

In his first Budget itself, finance minister Arun Jaitley assured investors on retrospective tax amendments to instil confidence among investors. He said ordinarily the government will not make any retrospective tax amendments that create fresh liabilities. Fresh cases arising out of infamous retrospective amendments in 2012 would be vetted by a high-level committee, he had said. 

In that budget, he also raised a threshold for income tax exemption from Rs two lakh to Rs 2.5 lakh. Along with that deduction, the limit under Section 80C was hiked by Rs 50,000 to Rs 1.5 lakh and deduction on interest paid on a housing loan to Rs 2 lakh from Rs 1.5 lakh earlier. 

Though these steps would definitely put more disposable income in the hands of people, there was no coherent step to reform direct taxes. 

In his 2015-16 Budget, the finance minister had announced that corporation tax rate would be cut from 30 per cent to 25 per cent. The intention was to eliminate various exemptions given to companies while lowering the tax rate at the same time. However, in the following year, the tax rate was reduced to 29% only for small business having turnover less than Rs 5 crore. The rate rationalisation was announced in the next year's budget by reducing the corporation tax rate to 25 per cent for enterprises with annual turnover up to Rs 50 crore. In the Budget for 2018-19, the 25 per cent tax rate was extended to companies with an annual turnover of up to Rs 250 crore. 

As such, all micro, small and medium enterprises (MSMEs) would draw 25 per cent tax rate. This would cover 99 per cent of the companies filing tax returns.

However, large companies that were hoping the corporation tax cut would be across the board were disappointed. This is particularly so when the US has already cut the corporation tax rate to 21 per cent from 35 per cent earlier, as part of its tax reforms. 

In his 2015-16 Budget, the finance minister extended benefits of presumptive tax to professionals with gross receipts of up to Rs 50 lakh with presumption that profits are 50 per cent of these receipts. 

The finance minister also announced that the General Anti Avoidance Agreement (GAAR) will come into effect on April 1, 2017, a delay of two years from the earlier schedule. The place of effective management was also announced to be implemented from that date. 

The NDA government's many initiatives towards digitalisation and demonetisation did lead to increase in the number of direct tax base and filing of returns. 

The NDA government got a tax base of 57.16 million in the financial year 2013-14 from the previous UPA regime, and this rose to 75.13 million by 2016-17. Similarly 33.14 million returns were filed for the 2013-14 financial year and this rose to 53.49 million by 2016-17. 

That said, the biggest of the direct taxes reforms would come from the direct taxes code (DTC). But, the government took a U-turn on the code. After the UPA government released its revised DTC draft in March 2014, at the fag end of its second stint, the NDA government in its very first Budget said it would review DTC. In the following Budget, Jaitley junked DTC, saying there is no great merit in going ahead with the measure in its current form. 

However, the finance ministry constituted a task force in November 2017 under the Chairmanship of Arbind Modi, a CBDT member and author of the previous DTC, to submit its report by May 2018. When the term was about to end, it was extended by three months till August 2018. In August of that year, it was given another extension of a month. 

However, the report could not be tabled as there were differences among members of the panel. 

Following this, the finance ministry appointed a second task force on the DTC under the chairmanship of Akhilesh Ranjan, a CBDT member, and asked it to submit its report by February 28. However, the finance minister at the fag end also suggested to the panel to rejig the tax slabs, particularly the 20 per cent category. The task force sought and later got an extension of three months to incorporate the ministry's suggestion. This means that the DTC draft could now only come in the tenure of the next government and the colour of that regime would decide its contours.

Neeru Ahuja, partner at Deloitte India, said the new government came to power in 2014 in the backdrop of huge tax uncertainty due to retrospective amendments to the Income Tax Act in 2012. The government in its first budget clearly articulated its intentions not to make amendments that create fresh liabilities. It also eased the administration of tax appeals and assessments to focus on only high-value taxpayers. 

However, after a few years, the tax jurisprudence gave rise to demonetisation and focused on tax evaders, while reforms took a back seat, Ahuja said. "We are still awaiting DTC and to that extend reforms were unfinished agenda," she added. 

The real success of the Narendra Modi government was to roll out GST on July 1, 2017, even though critics call it a half-baked indirect tax structure. 

It took over a decade of initiation of GST for the tax to be rolled out, after the government evolved a consensus among political parties and between the Centre and states. For this, it had to do away with up to one per cent tax on inter-state movement of goods to help the manufacturing states and assure them of full compensation for five years through constitutional guarantee. 

Abhishek Jain, tax partner, EY, said, "GST has truly been one of the historic tax reforms in the country and even while the ride may have had some blockades initially, any rational man would appreciate the multi-fold benefits encapsulated in this reform."

He said the big reason for the success of this reform is the concerted efforts of the government to proactively address concerns of the businesses.

The tax slabs set broadly at 5 per cent, 12 per cent, 18 per cent and 28 per cent exist even today, but within that, many changes have been made. Through several changes, particularly in November 2017 -- just before the crucial Gujarat polls -- in December 2018, the GST Council cut the items that draw the peak rate of 28 per cent to just 28 from around 270, when the GST was rolled out. 

The finance minister has assured that the slabs would also undergo a change with one standard rate instead of two at present -- 12 per cent and 18 per cent -- when GST collections stabilise. GST collections could meet the monthly target of Rs one trillion in only a few months till February of 2018-19. 

The GST implementation saw huge reluctance on the part of small and medium scale companies to file returns as they were too complicated. As such, the Council had to suspend two of the original forms -- GSTR 2, purchase returns and GSTR3B-- input-output returns. However, GSTR 1, which pertains to sale returns, continues. In place of GSTR 3, GSTR 3B was introduced. It pertains to summary input-output returns. 

All these returns would be replaced by simplified returns from July 2019. The pilot of these forms would start on April 1 this year. 

The new return formats named 'normal', 'sahaj' and 'sugam' would make the compliance process simpler for the smallest of businesses, wherein small taxpayers with a turnover of up to Rs 5 crore would have an option to file any of the three forms. But these are yet to be tested to verify the claim of the authorities of simple returns. 

In between, there are changes in the composition scheme, with no input tax credit for restaurants and under-construction houses. Other changes include the introduction of e-way bills, which are required for inter-state movement of goods worth over Rs 50,000, setting up of a centralised authority for advance authority and the national anti-profiteering authority for two years. 

The hallmark of the GST regime is that all decisions by the Council were taken through a consensus despite several differences on some of the proposals and the fact that there is a provision of voting in the Council.