Tax landscape: Focus on ease of compliance, taxpayers' rights in 2018

2018 is expected to take forward the tax reforms agenda, an important indicator for measuring index of doing business

For various reasons, the year 2017 will stand out as having witnessed disruptive tax reforms — the GST roll-out, coupled with a plethora of measures to crack the whip on the parallel economy, tightening the grip on political funding, and enhancing the investigative powers of the tax administration, to name a few. These measures have been a combination of legislative and administrative steps.

Penning my thoughts at the same time last year (Making sense of change, dated December 31, 2016) I reckon, in 2018, the tax reforms agenda could witness an overdrive. I had maintained an optimistically reformist tone on the GST roll-out, India fulfilling its commitment towards the G-20-led Base Erosion and Profit Shifting (BEPS) by being a signatory to Multilateral Instruments (‘MLI’), and many firsts in Budget 2017. Most have actualised, though not without teething glitches.

The year 2018 is expected to take forward the tax reforms agenda, an important indicator in measuring the index of doing business. The impact of reforms was visible in the 2018 World Bank (‘WB’) ranking (which catapulted India to 100th position from 130); ease of paying taxes, besides enforceability of contracts, resolving insolvency, and dealing with construction permits featured high in the rankings. On ease of tax payments, the WB ranking attributes digital payment of tax, standardising methods, and introducing accounting standards for tax computation as additional factors, though the government suffered a setback on the latter due to the Delhi High Court declaring most tax standards as unconstitutional.

Income Tax Code

Whether a new income tax code is an answer to reforms is anybody’s guess. Nevertheless, an exercise is underway and the earliest the government can introduce a Bill will be in the Winter Session of 2018, though I would imagine a wider stakeholder consultation could be compromised, besides factoring in time for a Parliamentary Select Committee reviewing an important piece of legislation of this nature. Realistically, we could see a new Income Tax Code in 2020. India would do well to focus upon reducing the cost of compliance burden and address the menace of piling tax disputes as priority. This necessitates more of administrative measures than legislative, which has been the focus of the administration, albeit in the first two years of the regime.  

Smoothening GST

An important area of focus is smoothening the rough edges of the GST, a task in which the GST Council has been most active. Given the nature of the dual GST levy, speeding up the inclusion of petroleum goods is a step in the right direction and bringing states on board would accrue GST benefits. The same would hold true for electricity taxes as there is little rationale to leave them out of the GST net. These measures are bound to make industry competitive, given the cascading impact, loss of credit, and share of petroleum and electricity tax in the indirect tax basket of India. The e-way bill will become a reality in early 2018 with the government’s decision to advance its implementation and the anti-profiteering law will play out as the GST Council initiates action against offenders.

 

Electoral bonds announced after the passage of the 2017 Finance Bill are likely to be rolled out with an eye on state elections towards the end of 2018. India’s position as signatory to the MLI will be evident in bilateral negotiations of tax treaties with important trade and investment partners and revisions of its provisional positions (with OECD), given that India has gone ‘all out’ to signal ‘No’ for all forms of treaty planning in its signing ceremony in Paris in June. India may witness an incremental dosage of administrative steps to combat the “black economy” in specified sectors, which are conventionally prone to tax evasion.

An overhaul of US tax reforms, particularly on the territorial tax and excise tax levy on imports, could prompt India to look again at changes in its domestic law. Though the calibrated reduction of corporate tax rates to 25 per cent remains an unfulfilled promise, it is difficult to predict if the fiscal deficit situation in 2018, which is expected to increase the country’s oil import bill, will leave sufficient room to cut tax rates. The drastic reduction in the US corporate tax rate to 21 per cent will force emerging economies to react as US MNCs will have a competitive advantage to repatriate income. The impact of the changes would be most in jurisdictions where US MNCs usually park profits or retain earnings for incremental investments.

Anticipate changes in domestic law to address issues specific to digital economy and blockchain technology business models. Critical issues that may necessitate an intervention of regulators and possibly tax laws include income from cryptocurrencies.

A plethora of tax reforms in India will require balancing the fiscal deficit and administrative reforms to address the country’s competitiveness as not just an attractive market but also ease of tax compliance. I see taxpayer rights coming to the fore with sensational Panama and Paradise leaks. Who knows what’s next, but 2018 promises to be an eventful year for the tax fraternity. 

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The author is Partner, BMR Legal, and the views expressed are personal. tweets@mukeshbutani