Costs and benefits of complications in indirect tax laws

27-May-2016 13:01 pm 0

Rain doesn’t make things messy. People do that all on their own. Similarly, the taxes can be very straightforward but the laws that we had made, make things complicated. Especially in the case of the indirect taxes.

Indirect taxes are those taxes which are imposed on goods and affect everyone. In fact, they have dominated the taxing scenario in our country until the 1990s. Central government revenues from indirect and direct taxes were in the ratio of 7:3 respectively in 1995. Now, the tables have turned and the ratio is 3:4. But the scenarios hasn’t changed much for state government where Indirect taxes still dominate the revenue by 7:1. The various complications, their costs and who reap their benefits are listed below-

  1. At the core of any task lies the motivation and that’s what is the problem with our tax laws. The system that we currently have is adversarial i.e. A system where any of the two parties can be right but it’s about who presents their case better. The system is all about the stick and not the compliance of the laws. Thus, the enforcing agencies have huge power about where to turn their head which is many times misused to bully the taxpayers.
  2. The have been many cases where the government has suddenly levied enormous retrospective indirect tax bills on corporations. Recently, Cairn India was slapped with a tax notice worth $3.6 billion for a transaction that happened 9 years ago. Such back taxes are as sudden as death. They can bankrupt organisations. Instead of piling up the taxes, they should be taken as soon as possible.
  3.  Foreign Institutional Investors (FIIs) pay a securities transaction tax and a 15% capital gains tax on securities held for less than a year. 15% tax isn’t really luring. We need foreign investment but the predicament with the government is that they don’t want India to be another tax haven. Also, Jaitley has advised unhappy FIIs to take their cases to court. But the marshy court system we have, only delays and make things more complicated.
  4. The laws that were created when we were under shadows of socialism still haunts us. In the 1970s, we had absurd 90% direct taxes. They were reduced to 30% in the 1990s, which was still way higher than the competitor nations. In order to give more incentives, various deductions and compensations were introduced but the system is like a Tax labyrinth. Union budget 15 reveals that effective tax rate those with profits above $100 million is 20.68% while for firms with a profit of $170,000, a rate is 26.89%. thus, loopholes exist where some companies avoid taxes altogether. Thus, simplification of the tax system should be one of the main concerns of the government. While these deductions may help some, but the complexity of system had created opportunities to evade taxes as well.
  5. There are different taxes for Union, state as well as local government. Businessmen have to keep separate records for each of them and contact multiple authorities which lead to harassment and thus, middleman comes to the rescue. The price of the middlemen, in turn, increases the price of the commodity. Also, most of the transactions in India are not digitalised. So, the passing of information is very troublesome. Now, digitalising the whole system and then passing the information efficiently is a distant dream. For now, businessmen have to pay tax(central) on tax(state) on tax(local). This increases the price of the commodity.
  6.  The double taxation problem- One of the biggest complexity is with regard to the taxation of a transaction as both a supply of goods as well as service, with the tax of both the State VAT and the service tax being applicable thereto. That’s what happened in the case of State of Karnataka Vs. Airtel – Broadband Internet connection already comes under the service tax as the users sign a document that they are availing a service thus, airtel should give only service tax but according to the government laws in the state of Karnataka, EM waves are created by airtel and are bought by the subscriber. Thus, there is a consumer of a good. Therefore, they are under the state VAT . After many referrals to previous cases, the court concluded that “this determination can be done by each of the two taxing authorities in question and if such determinations resulted in a double taxation of a transaction that was an unavoidable legal consequence and that there was nothing improper or illegal as a result”. So, double taxation is here to stay and annoy any service provider whose service can be classified as the sale of goods. GST should remove this anomaly as it just makes our tax laws seem immature to the investors.

The complication mainly costs the general public as they are the ones who pay taxes. Corporates and middleman use the chaos and complications to their benefits by cutting corners and evading the taxes. The clearer will  be our tax laws, the less will be the clutter, corruption and  middlemen which in turn will decrease the taxes and thus, the prices of the commodities. Legitimate service providers will replace the middlemen and investors will be more inclined to invest and our economy will grow. Let me conclude with this quote from Schumaker “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage to move in the opposite direction”.

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Costs and benefits of complications in indirect tax laws
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Complications in Indirect Tax Laws. The taxes can be very straightforward but the laws that we had made, make things complicated.
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