India has seen considerable buoyancy in its tax policy. The tax regime in India has seen a paradigm shift — from 1970s when tax rates in the country were as high as 97% and taxes were the only sources of public finance to those when tax incentives became the order of the day for promoting sector-focused investment. In India, the Union Budget is an important instrument for the taxpayer to understand the direction of the economy and to know the areas, which capture Government’s attention for socio-economic reforms.
The major challenges of the Indian economy sought to be addressed in the Union Budget 2015 include — boost in manufacturing, increase in foreign direct investment, increased disposable income in the hands of common man, focus on social security and health care policies and restoration of fiscal discipline.
Clearly, the measures proposed to handle these challenges in Union Budget 2015 reflect a mind-set of fiscal prudence over populism. Some highlights of personal tax proposals include — increased service tax, surcharge on the superrich, abolition of wealth tax, and increased tax incentives on investment in schemes meant for social development. One of my personal favorites, however, is the enactment of a new law to tackle the menace of black money. This measure comes well in time when stories on black money and assets held overseas by Indians (not offered to tax in India) have come under increased media attention and stoked public debate with no tangible action from the Government.
Black money refers to wealth earned through illegal means or legal income that is concealed from public authorities and not offered to tax. Black money results in loss of government revenue, thereby affecting the potential of the government to spend public money on development schemes. This affects a large section of the population who could have otherwise benefited from government expenditure.
Black money also hampers the growth of financial and real estate sector institutions, creates economic inequality and affects overall GDP of the economy. The growth of institutions in the financial sector, whose objective is furtherance of investment prospects in projects, which contribute to long-term economic growth, is hampered because of black money, which is parked in sterile and high return assets such as real estate, art, antiques, jewellery. This, in turn, hampers optimal allocation of resources in the economy, slows economic growth and distorts the economy’s international trade and capital flows.
Some of the interesting measures proposed in the Union Budget 2015 to contain the menace of black money include — discouraging cash transactions by incentivizing credit and debit card transactions, penalties and prosecution for concealing income and inadequate disclosure of income, enhancing disclosure requirements in case of cross border transactions and high value transactions and confiscation of benami property. It is interesting to note that the requirement for asset reporting in wealth tax returns will be implemented via income tax returns. We just hope that caution and wisdom will prevail in how return forms will be designed and how these measures will go on to simplify tax administration and improve compliance.
It is heartening to know that the Finance Minister has not lost focus on transparency and a tax-payer friendly policy. The promise that the recommendations of the Tax Administration Reform Commission will be implemented during the course of the year is in line with this theme. If compared globally, we are still a few steps behind when the trend of cooperative compliance has already debuted and tax authorities in countries such as the Netherlands, Australia and Ireland are already signing agreements with large taxpayers for full disclosure in return for prompt assessment of tax issues.
We will have to wait and watch how the focus on tax transparency is addressed and actioned by the Government. We would like to see a technology-enabled tax environment given that a significant amount of the world’s technology is created in our country.
It’s an overall good budget and what is satisfying to note is the focus on giving life to several policy initiatives and clearly outlining the work to be done in the days to come.