Reforming Tax System to make it Simpler, Broader and more Stable
“TAX reforms can play a decisive role in supporting growth, by removing distortions and enhancing transparency and predictability of tax systems while increasing the efficiency of tax administration and boosting revenues. The central government, in co-operation with state governments, seeks to implement important tax reforms, including the introduction of a Goods and Services Tax (GST). The current indirect taxation system is complex, involves cascading taxes that bias production decisions, and hinder inter-state trade. A national GST, coupled with a state GST, would rationalise indirect taxes while preserving states' financial autonomy.
To keep the overall rate low, the base should remain as broad as possible. Ideally, a single tax rate should apply in each state and where differential rates apply, they should be kept as low as possible and confined to a limited range of products. A major effort is now required to finalise implementation details.
The central government is also seeking to reform direct taxes and negotiations are continuing on a revised Direct Tax Code. The proposed changes would increase the tax-free threshold, releasing many low-income taxpayers from the tax net, thereby reducing administration costs. They would also reduce the corporate tax rate and broaden the corporate tax base. A further proposal is to reduce the tax on savings, including by making contributions to pension schemes free of taxation. While this measure would help promote savings, it is important that the government adopts a balanced approach and avoids excessively generous tax treatment.
Reforms are also underway to streamline a number of tax expenditures. The government also needs to ensure a certain level of stability in the area of international taxation. Recent efforts by the government seeking to create an atmosphere of certainty and predictability in this area are very welcome and this will definitely boost investor sentiment and attract foreign direct investment.
India needs to address the issues concerning taxation of foreign companies too in a manner that balances its needs for expansion of the revenue base and with the confidence of the investors. The volume of overseas investment into India has grown over the last few years. While this has boosted employment, and helped develop infrastructure, it has also led to a growing number of tax disputes. In this context, the recent remarks of the government on the need to perceive the tax administration in a non-adversarial manner are welcome. India has tried ways and means to develop an effective dispute resolution mechanism and these steps need to be consolidated and developed” - from the OECD's “better Policies” - India - SUSTAINING HIGH AND INCLUSIVE GROWTH:
OECD Recommends:
1. Strengthen fiscal frameworks through legislative and institutional reforms.
2. Improve spending efficiency, especially on subsidies, by improving targeting and delivery mechanisms.
3. Proceed with the implementation of the GST, minimising exemptions to keep the base as broad as possible while also aiming for a single rate within each state.
4. Implement a revised Direct Tax Code, which streamlines collection and reduces the overall burden of direct taxes.
5. Push reforms in the area of international taxation in order to boost investor sentiment and provide a stable and certain tax environment for businesses.