07 February 2020 12:11:58 IST

Focus on a simpler tax code, reduce the cases stuck in litigation

The removal of tax benefits on investments is likely to impact inflows for insurance companies

The new direct tax slabs may, on the surface, appear disappointing to a middle-class expecting tax cuts. However, I expect it should kick-start the soft transition to a simpler direct tax regime aimed at increasing tax compliance through lower overall taxes and a simplified filing process while minimising the short-term pain of transition for the populace. Tangentially, the removal of tax benefits on investments is likely to impact inflows for insurance companies in a country like India, where often tax exemptions and deductions drive investment and insurance choices for the middle-class.

The Finance Minister has also used this opportunity to introduce the Direct Tax Vivad se Vishwas Bill, to address the approximately ₹8.65 lakh cases and appeals that are collectively pending in the Income Tax Appellate Tribunal and the courts, totalling to a disputed amount of ₹9.32 lakh crore.

Such a large number of disputes, coupled with a long resolution cycle and an extremely low success rate of litigation for the government (estimates put it at close to 10 per cent), means ongoing litigation serves no gainful purpose for either the tax department or businesses involved in these disputes. In such cases, businesses need to continue to make provisions for potential tax liabilities for such disputes, till a resolution is achieved.

The Centre has used this scheme as an opportunity to bring certainty to such businesses facing tax disputes. An initiative for the one-time settlement of a pending litigation, whose tax demands are locked in dispute in multiple forums, is that one can pay due taxes by March 31, 2020, and get a complete waiver on interest and penalty. A back of the envelope calculation shows that this scheme could net the government upwards of ₹2 lakh crore, the equivalent of a third of the fiscal deficit target for 2019-20. Doing so would also act as a mini-stimulus for many small and medium-sized businesses.

(The writer is a student at Indian School of Business.)