Task force recommends four far-reaching changes in Income Tax law

Suggests rejig in tax slabs, with some relief for those earning up to Rs 55 lakh a year; Corporation tax rate may come to 25% for all; DDT may go, procedures for dispute settlement may be streamlined

We may be seeing a new income tax law if the recommendations of the task force in re-writing the old Act are accepted and implemented.

The panel, headed by CBDT member Akhilesh Ranjan, is said to have suggested four major things: tweaking personal income tax rates, cutting corporation tax rates to 25 per cent for all companies, domestic or foreign, doing away with dividend distribution tax (DDT) and easing the process of scrutiny and settling disputes.

Personal income tax

The most crucial recommendation of the panel relates to personal income tax. It is understood to have recommended relief or rebates to persons earning up to Rs 55 lakh a year by rejigging the 20 per cent and 30 per cent tax slabs and giving rebates.

If one looks at the statistics provided by the income tax department, those earning up to Rs 50 lakh file 49 million returns, representing 99.3 per cent of the overall returns. Giving relief to so many tax payers sounds ambitious, to say the least.

Amit Singhania, partner at Shardul Amarchand Mangaldas, said those earning higher income should contribute to the exchequer. “Those at the lower end of salaries, say Rs 2.5-5 lakh a year need relief as they need resources to sustain,” he said.

However, sources said some kind of way will have to be found so that this relief does not cost the exchequer.

Also, most returns are filed at the lower tax slab. For instance, the highest number of returns, at 14.18 million returns or 28 per cent of the total, were filed at Rs 2.5-3.5 lakh annual income level in assessment year 2017-18. It should be noted that later, those having up to Rs 5 lakh taxable income have been exempted from personal income tax. This means those earning up to Rs 9-10 lakh a year may get tax exemptions, depending on their tax planning.

Currently, those earning more than Rs 5 lakh and up to Rs 10 lakh a year fall under the 20 per cent tax bracket, while those getting over Rs 10 lakh a year attract 30 per cent.

Corporation tax

If one leaves aside foreign companies, 99.3 per cent of domestic firms have already been brought under the 25 per cent tax rate in this year’s budget.

“Currently, the lower rate of 25 per cent is only applicable to companies having annual turnover up to Rs 250 crore. I propose to widen this to include all companies having annual turnover up to Rs 400 crore. This will cover 99.3 per cent of the companies. Now, only 0.7 per cent of companies will remain outside this rate,” finance minister Nirmala Sitharaman had said in her maiden budget speech.

However, this did not meet the promise made by her senior, late finance minister Arun Jaitley, that corporation tax rate would be brought down to 25 per cent for all companies by 2018-19.

If one looks at the income tax statistics, the top 0.4 per cent of companies accounted for 54.3 per cent of corporation taxes collected in the 2017-18 assessment year. If we broaden the top companies to 1.6 per cent, they pay 63 per cent of total corporation tax. This means that 0.7 per cent of top companies pay somewhere around 54.3-63 per cent of total taxes.

“These top companies have been left out of 25 per cent tax rate because their number may be small, but they pay huge amounts to the exchequer,” said Singhania.

However, with plethora of the current corporate exemptions, the lower rate may not hit the exchequer much if exemptions are done away with, he added.

“The impact of corporation tax cut on the national exchequer should not be significant. The rationale is that the earlier 30 per cent tax rate came with plethora of exemptions and deductions. Therefore, in the earlier regime also the effective tax rate was lower than 30 per cent. The foundation of the corporation tax rate cut is based upon phasing out of the said exemptions and therefore there will only be slight (downward) impact in effective tax rate,” Singhania said.

Most of the exemptions are already being phased out and are at the tail end of their withdrawal, he added. The effective rate of corporation tax stood at 29.49 per cent for the entire base of companies reporting profits in financial year 2017-18. This is higher than the effective tax rate of 26.89 per cent in financial year 2016-17, due to gradual phasing out of profit-linked deductions and levy of minimum alternate tax on companies.

Even as exemptions are being phased out, those given to companies are projected to hit the exchequer to the extent of Rs 1.08 trillion in 2018-19, as against Rs 93,642 crore the previous year, according to the Budget papers.

Singhania said the suggestion to reduce the corporation tax rate for all is quite encouraging.

“This will not only leave more surplus in the hands of Indian corporates but will also make them more competitive in comparison to their peers globally. This corporation tax rate cut will also help companies in meeting post tax IRR of the investors and in turn help in attracting more foreign funds,” he said.

The rate cut would address disruption caused by the US tax reforms last year. The United States had cut corporate tax from 35 per cent to 21 per cent last year.

Foreign companies are regarded as those which have project offices or branch offices in India. They are liable to pay 40 per cent tax with cess and surcharges. Indian subsidiaries of MNCs are taken as domestic companies. Those domestic companies having annual turnover of over Rs 400 crore pay 30 per cent tax with cess and surcharges. However, if one includes dividend distribution tax (DDT), which is paid by domestic companies and not foreign counterparts, the effective tax rate applicable to both comes to over 40 per cent.

But now, foreign companies may also pay 25 per cent tax, if suggestions of the DTC task force are implemented.

This would be so even as the panel suggested doing away with DDT and levying it at the hands of the shareholder instead.

Dividend distribution tax

Currently DDT is levied at 15 per cent. With three per cent cess, 12 per cent surcharge and, grossing up, it works out  to over 20 per cent. Grossing up is a technical term in income tax parlance, where the dividend paid is increased to the amount of taxes paid, and then tax is levied.

As DDT is currently levied at the hands of companies, the dividend receiver is not able to get the tax credit for the same, said Rohinton Sidhwa, partner at Deloitte India.

If DDT is levied at the hands of tax payers, they would be able to get the tax credit and their total tax liability may come down. Those not paying any tax because their incomes fall in lower brackets may be able to get tax refunds, he said.

Also, foreign investors in an Indian company do not get tax credit in their home countries as DDT is not levied on them. However, after the change, they would also be able to get the tax credit, Sidhwa said.

DDT does not deliver much to the government kitty. According to budget papers, it yielded just around Rs 42,000 crore in 2017-18.

Settlement of disputes

There are also likely to be measures to reduce litigation between the tax authorities and assesses, if the panel’s report is implemented.

Taxpayers may be allowed to opt for negotiated settlement before a Collegium of Commissioners once they receive the draft order, say sources.

Last week, the CBDT sharply raised the threshold for filing appeals in tax disputes to reduce tax litigation. They increased the amount for Income Tax Appellate Tribunal to Rs 50 lakh from Rs 20 lakh, for High Court from Rs 50 lakh to Rs one crore and Supreme Court to Rs 2 crore from Rs one crore. These limits are also effective for pending cases. CBDT has asked its field officers to withdraw the pending appeals if those fall within the new threshold.

The panel also recommended a Litigation Management Unit to manage the entire tax litigation process, right from deciding in which cases appeals ought to be filed, to devising the strategy to defend a case, sources say.

For transfer pricing cases, a separate functional assessments unit may be set up for a block of four years, sources said. 

Direct Taxes Code: A prolonged wait for a new direct tax law that lingers on

August 2009: First draft DTC code is released along with a discussion paper

June 2010: A revised discussion paper is issued

August 2010: DTC Bill is tabled in Parliament, is referred to Parliament's standing committee on finance

March 2012: Committee submits its report to the government

March 2014: A revised DTC draft is prepared

July 2014: New government says it will review DTC

February 2015: FM Arun Jaitley junks DTC, says there is no great merit in going ahead with it "as it exists today"

November 2017: A task force on direct tax law is appointed under the chairmanship of Arbind Modi, a CBDT member and author of the previous DTC; name of the proposed Act is changed from DTC to direct tax law, its report is to be submitted by May 2018

May 2018: The term of the task force is extended by three months to August 2018

August 2018: The task force is given a one-month extension

September 30, 2018: Arbind Modi retires without submitting a report. Some members do not sign on the report

November 2018: Another task force is appointed under the chairmanship of CBDT member Akhilesh Ranjan

February 28, 2019: Initial deadline for the panel to submit report, however  many extensions are given to the task force

August 19, 2019: Task force submits its report  to finance minister Nirmala Sitharaman. The report is yet to be made public. It's still in the draft and the Bill is yet to be framed.