The last few years have been truly tumultuous for the global economy, with unprecedented economic and geopolitical developments. Within this changing external scenario, the Indian government has done well to maintain stability in tax rates. Today, the country is recognised for its strong growth performance and continued potential to contribute to global growth, even as conditions remain uncertain.

With growth as a primary objective, the forthcoming Budget needs to keep the focus on tax certainty for businesses and the lower corporate tax rates announced in previous Budgets should remain untouched. This would impart confidence and certainty to businesses planning new investments. A few key steps would help to rationalise and simplify taxes.

First, a significant incentive provided for the manufacturing sector as part of Atmanirbhar Bharat mission was the concessional tax rate of 15 per cent, subject to certain conditions. This was applicable to manufacturing companies set up from October 1, 2019 and commencing operations before March 31, 2023. Given the current economic uncertainty, it is suggested that the sunset period be extended for another two years to March 2025. Such a step would encourage manufacturing companies to take up capacity creation and thereby generate employment.

Second, digitalisation, assessments, and paperless payments have greatly streamlined the tax payment processes. Dispute resolution and minimisation of disputes must be further addressed by improving the functioning of mechanisms like Faceless Appeals, Advance Pricing Agreement, Board for Advance Ruling and Dispute Resolution Scheme.

Third, with the addition of section 194R and section 194S in Finance Act 2022, there is now a wide variety of TDS provisions applicable to payments to residents with different rates and different thresholds, which can be confusing and lead to disputes. While the importance of all TDS information getting captured in Form 26AS/AIS of the deductees makes it easier for the government to collect the balance taxes from the resident taxpayers, the government may consider laying down a roadmap for reducing the disparity in TDS rates by having only two or three categories of payments and a small “negative list” of payments which will not be liable to TDS. This will ease the compliance burden on the taxpayers and simplify the TDS regime.

Capital Gains

Fourth, at present, there is no consistency in capital gains tax rates or holding period for different types of instruments falling within the same asset class. Even the indexation benefit differs in different situations. The tax rates also differ for residents and non-residents. The government must bring out a framework for greater simplicity, consistency and rationalisation of the capital gains tax regime.

Five, consequent to the reduction of corporate tax rates, the differential between personal and corporate tax has widened. The highest marginal rate for individuals has now gone up to 42.74 per cent (highest slab) against the normal Corporate Tax Rate of 25.17 per cent. This differential between individual and corporate tax rates is leading to several structuring decisions being adopted in favour of corporate model, such as proprietorship business moving to company format.

This has become further complicated with Budget 2020 having introduced a new tax regime of income tax for individuals that co-exists with the old one. To boost private consumption expenditure, a reduction in tax rates for individuals with total incomes upto ₹20 lakh may be considered to provide relief to middle class taxpayers.

Budget 2023-24 would consolidate and strengthen India’s growth momentum and these steps would contribute greatly to the effort.

The article was first published in The Hindu Businessline, on 27 December 2022.

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