Akhilesh Ranjan, former member of the Central Board of Direct Taxes, and an authority on Income Tax in India, said:“Tax policy has always been treated separately from economic policy though it is the core of economic policy. Many countries have realised the importance of having a strong tax policy,” setting the context for his talk to the IIM Bangalore students.
Explaining that taxation is a sovereign function, but policy makers decide who is to pay the tax and how much they must pay, he gave a brief overview of prevailing practices in different countries. “Progressive income tax structure in India is based on ability to pay; simplicity, tax neutrality and efficiency are the pillars on which this structure is based,” he said, adding that tax policy should not impede enterprise.
Beginning of multilateralism in tax
Offering a perspective of trade increase and setting of standards for taxation of global income (territorial principle, residence and source principles), Ranjan described the comprehensive tax rules that came out post World War II formulated by economically advanced countries. “That policy which became global templates were heavily in favour of producing countries which had technology and capital. That implies that enterprises based in advanced countries wouldn’t like to pay tax in countries where they have markets or do business,” he explained, showing how this led to litigation and disputes.
Arguing that India had felt the pinch of such a policy, he said the only saving grace was that countries could enter into bilateral treaties on taxation. “The next major change came in 2008, during the global economic meltdown, where large economies went into recession. The advanced countries now realised that MNCs had been too smart!” This, he said, marked the beginning of multilateralism in tax.
The virtual lecture titled, ‘Multilateralism in tax and its impact on domestic tax policy’ was organised by IIM Bangalore’s one-year full time Master of Management Studies (Public Policy) — the Post Graduate Programme in Public Policy & Management, as part of PGPPM’s event ‘Policy Speaks,’ a Public Policy talk series.
Impact of multilateralism
Tracing the genesis of multilateralism in tax in the G-20 OECD endorsement of this idea, Ranjan said it was then decided to plug the loopholes so as to preserve the tax bases of countries. “Some action points of this project required changes to tax treaties and recommended changes to domestic policies. It achieved a consensus among a large number of countries (45).”
A major success for multilateralism, he said, was that G-20 countries were now focused on tax policy. They decided that tax treaties would now contain clauses that the treaties were not meant to be used for tax avoidance (principal purpose test). “For the first time, a Multilateral Instrument (MLI) was drafted and had been signed by 85 odd countries. The MLI has been able to modify dozens of existing bilateral treaties.” Domestic tax policy, he explained, was also influenced in a big way.
Pointing out that countries also realised that HNIs or the really wealthy were able to stash their money in different parts of the world, he said they decided to call for transparency in financial accounts information. “FATCA in the US required tax information exchange. This was followed by the OECD developing a common reporting standard in 2013.”
India has enacted laws requiring all its financial institutions to identify accounts held by non-resident tax payers and report details of such accounts to the Indian government which would then report this to the respective tax jurisdictions. This is the AEOI (automatic exchange of information), which was meant to plug loopholes.
Contemporary challenges
“We need changes in tax laws in view of the increasing digitalisation of businesses,” he said, citing the examples of Google and Facebook. “Traditional businesses have also incorporated technology and run their operations digitally. This enables them to avoid paying tax because the tax law requires them to have a physical presence.”
India, he said, has been insisting on framing rules to tax such incomes, alleging that India’s efforts were stonewalled by countries like the US. “But, in 2016, India enacted the equalization levy — which is a tax on the amount of revenue which flows out of India on account of advertising income.”
Students of the PGPPM, the one-year Executive Post Graduate Programme in Management, the PhD programme and the two-year PGP engaged with Akhilesh Ranjan in a 45-minute interactive session. “The silver lining during these difficult times is that we get to engage with a wider audience, especially from a school as prestigious as IIM Bangalore,” the speaker observed.