Author: Ektha Vivekanand, a student at School of Excellence in Law, The Tamil Nadu Dr Ambedkar Law University
Abstract:
The appropriate imposition of all forms of taxes and its regulation is a universal problem. However, a significant portion of this problem is contributed to by firms that are required to pay corporate taxes to the government, but fail to adhere to the norms laid out and opt to indulge in practices like tax avoidance and tax evasion instead. This article primarily delves into the challenges that are prevalent in the tax structure in India, especially in the case of corporate taxes after providing a brief introduction to corporate taxation and its benefits. Policy recommendations to rectify the circumstances created by the challenges have also been provided.
Introduction:
Corporate Tax is a levy imposed by the government on the income earned by corporations. Akin to other forms of direct and indirect taxation, corporate tax acts as a source of revenue for the government. The purpose of the levy is to impose a legal duty on corporations towards the government. Other responsibilities corporations have towards society is mandated corporate social responsibility activities in order to ensure companies contribute to social causes in an ethical manner.
As per the Income Tax Act 1961, all domestic and international companies that operate in India are required to pay corporate tax. A domestic company is charged on its total income earned; however, an international company is charged tax only on the income earned within India. Domestic businesses are inclusive of public and private companies. A truly beneficial taxation system for any country, involves the promotion of the ease of doing business while also eliminating any possibilities of tax evasion.
Corporate taxation in India has been subjected to the microscope multiple times to determine the challenges in the system. This is done as the provisions need to be studied in order to ascertain the reasons behind white collar crimes like tax evasion. High corporate tax rates, complexities in the provisions, compliance costs etc are all factors that have contributed to the overall dip in the ease of doing business in India.
The challenges faced by the Indian economy due to its taxation system are manifold. Tax evasion and avoidance are prevalent problems that are fought with on a regular basis. The battle against evasion is an everlasting one in the Indian context. The prevailing tax provisions also have a lot of implications on other factors within the economy such as investment decisions, resource allocation, while also providing immense scope for economic growth and development.
Advantages of Corporate Taxation:
All legal provisions and public policies are created for the betterment of society as a whole and for the benefit of a certain section of the population. Hence, in order to truly understand the legal challenges in the realm of corporate taxation, it is essential to comprehend the beneficial factors of the same. A comprehensive understanding of the system can only be obtained when the advantages are analysed in tandem with the disadvantages.
Post collection of corporate taxation, it is important to note that it occupies a significant share of the overall revenue earned by the government in any financial year. Taxation itself is one of the primary sources of revenue for the government, and collections from corporations constitutes a large chunk of taxation. The revenue earned by the government is usually utilised for expenditure incurred by the government such as infrastructural development and the provision of other social services like education and healthcare. Hence, corporate taxation helps in covering these expenses that the government has to incur for the benefit of the people.
A noteworthy aspect of corporate tax is the fact that it reduces income inequalities. By imposing a burden on businesses as well, it ensures that the country is not functioning in such a way that the rich get richer while the poor never receive an equal stature. It helps in ensuring fairness in the duty owed by the people towards the country which they satisfy by way of paying dues. The logic used to justify the mandating of corporate social responsibility activities can also be used in this context – companies need to pay their dues for the simple reason that they are utilising the country’s resources in their working.
The system helps in ensuring transparency since it provides insight as to how much income is being earned by a company in a given financial year. The burden of taxation is shared by businesses instead of only imposing the levy upon individuals through this system. It also serves as a check on a corporation’s activities to ensure they are functioning in a legal manner and not indulging in activities such as tax avoidance and tax evasion.
Challenges in Corporate Taxation in India:
A major challenge faced in the system prevalent in India is the fact that the system itself serves as a constant hinderance imposed on the ease of doing business for corporations. The intention of the governing authority in the country should be to attract further investment into the country which can be done by providing attractive incentives. However, various other factors within the system results in its hindering nature. Some of these specific challenges are –
- Exorbitant tax rates: A primary disadvantage with high tax rates is the fact that it discourages businesses from increasing their investment and expanding their operations. This results in resource allocation levels being less than optimal and a slower rate of overall economic growth. These rates also encourage businesses to explore other avenues such as profit shifting in order to reduce their overall tax liability. The potential of financial gain from the underreporting of earnings before the government increases the overall greed of companies. Companies are more likely to discover and take advantage of loopholes in the system that enable them to retain more profits, than to pay higher amount of taxes.
- Intricacies and Ambiguities in Legal Provisions: Like all Indian statutes, the legal provisions that govern taxation in India are also burdensome on businesses by providing numerous rules and regulations that require a certain degree of expertise to comprehend. Most small companies cannot afford to pay additional salaries to hire experts to interpret the law of the land. An alternative they may choose to adopt, is to reduce their overall compliance. Compliance costs are seen as a superfluous expense that adds to the financial burden of a company. The process of compliance being long and technical may encourage companies to adopt evasion techniques to avoid the hassle. Misinterpreted tax structures result in an increased rate of evasion and reduced compliance. Policies may be viewed as having been adopted by the government due to political motives which can discourage organisations and individuals from compliance. Firms that have political backing tend to evade taxes with the utmost confidence due to the legal and political backing they have. Lack of coordinated efforts among officials can result in poor enforcement of the policies. A fragmented approach can encourage firms to identify more loopholes to exploit.
- Tax Litigation: This challenge primarily involves legal disputes on taxation between taxpayers and tax collection authorities. The addressal of tax disputes in India can result in an easier business environment that is more favourable towards the corporations which will serve as an incentive.
- Tax Administration Issues: There are various issues in the process of tax administration in India that needs to be addressed. At present, these issues are considered to be challenges. Efficient tax administration is needed for the efficient functioning of any economy and for the appropriate functioning of the tax system. Inefficiencies can be by way of increased compliance burdens, delayed processing and reduced transparency. There exists an absolute distrust in the government on the part of the people which negatively impacts tax collection. The taxpayers assume their tax payments will not be appropriately disbursed towards public welfare. The firms view tax evasion as a direct immediate gain and do not view getting caught for the same as a matter of concern. This lethargic attitude towards the matter can be attributed to the lack of stringent action against wrongdoers. Tax evasion is also considered to be justified by the inherent corruption taking place among tax administration authorities. Firms may even resort to bribing tax officials in the event that they are caught for the crime.
Policy Recommendations:
Identification of challenges within the system is important, but a crucial step beyond the identification is to change the structure of the system, make it more efficient and effective and address the challenges that are being faced with appropriate policy measures to remedy them. Tax evasion is an all-pervasive problem which needs to be tackled with stringent action and punishments. Identifying the challenges and the root causes behind them is only the first step and it cannot be the final step. Some suggestions or recommendations to solve certain challenges are –
- Reducing complexities in legal provisions – A fundamental strategy to improve corporate taxation in India and increase compliance would be to simplify the legal provisions. This would result in an overall reduction in compliance costs for companies as it would not require experts for interpretation and would thus encourage companies to adhere to the policies. Tax codes should be unambiguous to ensure uniform compliance. The clarity in provisions would also minimise the number of disputes that occur between taxpayers and tax authorities thereby reducing the challenge of tax litigation. Courts in cases like L.G. Electronics India Private Limited vs. Deputy Commissioner of Income Tax and Others have also highlighted the need for a system with fewer tax exemptions to promote clarity in provisions and compliance. This would also reduce any inequalities within the system. The rationalisation of tax rates has also been highlighted to have been of paramount importance in cases like A.R. Overseas Tradecom (P) Ltd. vs. D.C.I.T.
- Encouraging Tax Compliance – Awareness and education programs on the benefits of compliance with regulations can help in promoting compliance. Taxpayers need to understand their overall obligations and responsibilities. Providing incentives for voluntary compliance can be a strategy to encourage individuals and businesses alike to pay their dues. This was also emphasised upon in cases like L.G. Electronics India Private Limited vs. Deputy Commissioner of Income Tax and Others which indicates that the strategy can be effective. Reducing penalties and providing tax credits can prove to be effective incentive measures.
- Promoting Economic Growth – Encouraging research, development and innovation in policies can help develop innovative policies that can promote compliance and in turn, lead to economic growth. The importance of incentivising tax compliance and payment has also been highlighted in the case of A.R. Overseas Tradecom (P) Ltd. vs. D.C.I.T. The incentives can also increase employment opportunities and attract investments.
- Improving Tax Administration – Infrastructural development in areas of tax administration can help increase its efficiency. The importance of the use of technology and data analytics in enhancing the administration process was emphasised upon in Suminter India Organics Pvt. Ltd V.s. the Deputy Commissioner of Income Tax Mumbai. Incorporating the use of technology into the process can help in increasing compliance, reducing errors in accounting or compliance, and expediting processing. Dispute resolution can also be done by ways of arbitration and mediation to reduce the litigation overload. Specialised tax courts can also be set up to increase the efficiency of dispute resolution.
- Incorporation of international relations – Considering India is operating in a globalised world; all tax policies need to be made by cross-referencing them with bilateral and multilateral agreements entered into with other countries. Tax related complexities are reduced through using these agreements since they are drafted with excruciating detail in order to ensure clarity and consistency. Double taxation can also be avoided.
Conclusion:
Corporate taxation involves many challenges on all fronts from administration to compliance. However, corporate tax is a vital component of government revenue and in achieving socio-economic equality. It has its advantages but its challenges are also numerous. The intricate nature of tax legislation, elevated tax rates, and ongoing regulatory changes can dissuade investment, impede growth, and impose compliance challenges on businesses.
Improvements in corporate governance, enhancing tax administration, and tackling political connections are some of the key factors necessary for decreasing tax evasion.
As a result, a well-rounded strategy is crucial to uphold a tax system that generates revenue while also promoting an environment where businesses can prosper.
FAQs:
Q. Can the inclusion of technology in taxation help in improving administration?
A. Yes, the use of technology can help in reducing the number of errors that take place in computing tax as well as its payment and it also helps in increasing the rate of compliance.
Q. Is the current Indian legal framework appropriate?
A. No, the current framework is laden with too many complexities that hinders the ease of doing business since it involves the incurring of compliance costs on the part of the companies which leads them to exploit loopholes and consider tax evasion as a viable alternative.
