This article has been written by Sagar Narendrakumar Surana pursuing Diploma in Technology Law, Fintech Regulations and Technology Contracts and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

With possibly one of the fastest growing economies globally, an immense domestic consumer base, and huge prospects for foreign investment, India could be considered to be a potentially great economy.

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One of three equally significant mountains of tax policy is still located in construction, design engineering, and operational management aspects (Bird 2008). The plan of tax policy prescribed by its objectives is given by architecture. It comes together with the mechanics of applied design depending on the type and quality of structures and institutions, which are related to tax collections. Depending on political support, the capacity of the tax authority and the availability of technology and information, management dictates the approach and action for implementation.

Inter-dependence of architecture, engineering, and management. The best-laid tax policy is equal only to the people that it administers. Yet, an adequately prepared administration cannot increase profits or curb corruption if the design of the tax system is flooded with multiple goals. Tax strategy should seek higher incomes at all costs, but not in distortionary ways. It becomes easier to implement and administer taxes where the plan is simplified and transparent systems exist even in developing countries, as in the case of India, which may have some serious administrative constraints.

How India compares when it comes to the administration of taxes and tax compliance varies with each source and the criteria used. Here are some potential ways of contrasting India and different nations regarding tax compliance and administration:

  • According to the 2021 International Tax Competitiveness Index by the Tax Foundation, which measures the extent to which a country’s tax system adheres to competitiveness and neutrality, India ranks 31st out of 38 OECD and OECD partner countries. India’s performance is marred by a high corporate tax rate, complicated tax incentives, and layers of tax agencies. This is despite India being ranked at position 36 back in 2014 due largely to the elimination of review tax collection and reduced company tax for certain corporations.
  • According to the Tax Complexity Index by the University of Paderborn and the World Bank Group, which measures the complexity of tax systems for multinational corporations, India ranks 53rd out of 100 countries in terms of tax code complexity and 58th in terms of tax framework complexity. The Indian tax code is complex in relation to other countries; it features a straight system composed of income tax, VAT, and GST. The case with India’s tax framework is slightly different in that it experiences lengthy and uncertain audit processes, changing tax legislation frequently, as well as an unusually high number of tax payments.
  • According to a report produced by the Organisation for Economic Cooperation and Development (OECD) under its Tax Administration 2022 programme, which compares international trends in tax administration among fifty-eight developed and developing countries, India exhibits positive performance in some areas of tax administration. That notwithstanding, India experiences some problems, including a low voluntary compliance rate, a huge tax gap, and a high cost of collection. It also looks at the efforts made in India to strengthen the country’s tax administration, which include facilitating faceless assessment and appeal, e-invoicing and e-way bills, as well as taxpayer education and awareness campaigns.

One vital part of corporate tax assessment that can’t be ignored is its effect on the ease of doing business in India. A business-friendly tax collection climate can essentially impact  investment decisions and the overall business environment. Here is a more critical glance at how corporate taxation affects the ease of doing business in India:

Investment attractiveness

Corporate taxation  plays a vital role in determining the allure of India as an investment destination. High corporate duty rates and complex tax structures can deflect foreign investors and thwart the development of domestic organisations. Reducing tax rates and simplifying tax procedures can make India more attractive to investors, prompting increased foreign direct investment (FDI) and domestic capital formation.

India has a high corporate tax rate of 30%, which is higher than the average of 23% in the OECD. This makes it less attractive for foreign investors to set up shop in India. Additionally, the tax code is complex and difficult to navigate, which can deter investors from even considering India as a potential investment destination.

Reducing the corporate tax rate and simplifying the tax code would make India more competitive in the global marketplace. This would encourage foreign investors to set up shop in India, which would lead to increased FDI. Additionally, domestic businesses would benefit from the lower tax rates, which would lead to increased investment and growth. In addition to reducing tax rates and simplifying the tax code, India could also improve its investment climate by providing better infrastructure, improving the ease of doing business, and protecting intellectual property rights. These measures would make India a more attractive destination for investors, which would lead to increased FDI and domestic capital formation.

Compliance burden

The simplicity of  tax regulations is a critical factor for organisations. Complex tax regulations and an unwieldy compliance process can increase regulatory overheads and deter organisations from operating in India. For example, a 2018 World Bank report found that India has the 11th highest tax compliance cost in the world. This is due in part to the fact that India has a complex tax code with multiple layers of taxation, which can make it difficult for businesses to comply with all of the rules. Additionally, the tax compliance process in India is often slow and inefficient, which can further add to the cost of doing business. Streamlining tax procedures, executing digital platforms for tax filing, and diminishing paperwork can altogether improve the ease of doing business in India. Streamlining tax procedures would make it easier for businesses to comply with the tax code, while digital platforms for tax filing would make the process more efficient. Additionally, reducing paperwork would reduce the amount of time and effort that businesses need to spend on tax compliance.

These reforms would make it easier for businesses to operate in India, which would attract more investment and create jobs. Additionally, they would make India a more competitive destination for businesses looking to expand internationally.

Impact on small and medium enterprises (SMEs)

SMEs are the foundation of the Indian economy. The burden of high corporate taxes can lopsidedly influence these organisations. Contributing to over 45% of the country’s GDP and employing over 80% of the workforce. However, these enterprises are often burdened by high corporate taxes, which can disproportionately impact their bottom line.

The corporate tax rate in India is currently 30%, which is one of the highest in the world. This high tax rate can make it difficult for SMEs to compete with larger, multinational corporations, which often have access to lower tax rates in other countries. Additionally, the high tax rate can discourage SMEs from investing in new growth opportunities, as they may not be able to afford the additional tax burden.

In order to support SMEs and promote economic growth, the government should consider lowering the corporate tax rate. This would make it easier for SMEs to compete, invest, and create jobs. Additionally, the government could provide tax incentives for SMEs that invest in research and development or create new jobs. These measures would help level the playing field for SMEs and encourage them to grow and contribute to the Indian economy.

In addition to the high corporate tax rate, SMEs also face a number of other challenges, including access to capital, a lack of skilled labour, and regulatory compliance. The government can help address these challenges by providing financial assistance, training programmes, and regulatory reform. By supporting SMEs, the government can help create a more vibrant and inclusive economy.

Investment decision making

Corporate taxes directly affect investment decisions, like spending on new equipment, expanding businesses, research and development, etc. A favourable tax environment encourages companies to invest in technology, innovation, and infrastructure, which can improve the overall economy. For example, a company that is considering investing in a new research and development project may be more likely to do so if it is offered a tax break on the investment. Similarly, a company that is considering building a new factory may be more likely to do so if it is offered a tax break on the construction costs. These investments can lead to new jobs, higher productivity, and increased economic growth.

In addition to encouraging investment, a favourable tax environment can also help attract businesses to a country. This can be a significant advantage for countries that are competing for investment from multinational corporations. For example, a country that offers a lower corporate tax rate than its competitors may be more likely to attract new businesses. This can lead to increased economic activity and job creation.

Of course, there are also other factors that businesses consider when making investment decisions, such as the availability of skilled workers, the quality of infrastructure, and the political stability of a country. However, a favourable tax environment can be a significant advantage for countries that are trying to attract investment and promote economic growth.

Tax disputes and litigation

Dealing with lots of tax disputes and litigation can make doing business in India hard. To make business better, it’s important to solve tax disputes quickly and in a transparent manner. Alternative dispute resolution mechanisms, such as mediation and arbitration, can help reduce the burden of prolonged legal battles. Mediation is a process in which a neutral third party helps the parties to a dispute reach a mutually agreeable settlement. Arbitration is a process in which a neutral third party hears the evidence and makes a decision that is binding on the parties. Both mediation and arbitration can be effective ways to resolve tax disputes, and they can often be less costly and time-consuming than litigation.

In order to make India a more attractive place to do business, it is important to have a fair and efficient system for resolving tax disputes. Alternative dispute resolution mechanisms can help to achieve this goal, and they can also help to reduce the burden on the courts.

The latest challenges in corporate taxation in India:

Impact of COVID-19  pandemic

Many organisations have lost their revenue due to the covid 19 pandemic, which has disrupted all their business activities. Tax compliance too is suffering from the little cash flow available in the organisations. In an attempt to balance this, various relief measures, such as extenuating deadlines and dropping interest rates, among others, have been put forward by the government. It should be noted that despite all these, the government also has its fair share of limitations. The businesses should thus reassess their situations and prepare strategic plans as a result.

Implementation of global minimum corporate tax

More than 130 countries around the world have agreed to change their ways of taxing multinational corporations. This agreement has two parts. The first piece allocates some fiscal rights to the areas that are major trade destinations for such firms despite their absence in those locations. The next component introduces a worldwide minimum tax floor rate of not less than 15% for multinationals with business income exceeding € 750 million. Therefore, India should view how such changes are going to change it’s tax income and tax laws and then adjust its own tax laws accordingly. Given that they have a large consumer base coupled with low tax rates, India supports this global minimum tax as it sees benefit from it. Nevertheless, these include issues such as ensuring that the rules conform with what is acceptable in other countries; protecting India’s authority in terms of taxation; balancing India’s interests versus those of developing nations; and taking into consideration the complaints received from her own industrial sectors.

Rationalisation and simplification of tax incentives

In a bid to promote some industries and activities like manufacturing, there is differential tax treatment within India with regard to areas such as special economic zones, under-developed regions, and research. However, such incentives could be intricate and pose a challenge to the tax system. This is something that the government should be thinking of, as they can make these incentives easier depending on business performance. It would also be convenient for the taxpayer’s side and increase the effectiveness of the tax system. In addition, the government must periodically confirm that such stimuli remain appropriate, taking into account changes in national circumstances and worldwide tendencies.

Strengthening of tax administration and dispute resolution

Tax payment is a bit of a challenge for Indians. According to the latest World Bank’s Doing Business ranking, India holds a dismayed position at 115th place relative to the other 190 countries based on their ease of tax payment. Companies in India find it tougher and costlier to administer tax matters than companies across the world on average. In addition, India has a number of tax authorities at varying levels. This means that sometimes the tax demand can create contradictory demands, leading to legal disputes. However, this process may be simplified by the government making tax operations easy and by electronic mechanisms such as online return filling and paying of taxes. Different tax authorities must work well with each other. Besides, mediation and arbitration should be used for faster resolution of tax disputes. This would be particularly beneficial for businesses and people in India.

If India solves the country’s tax problems as well as makes the business-related tax system convenient, it will improve its ecosystem from this perspective. India should realise that this step can lead to achieving its global plan of attaining a $5 trillion economy by 2027. A well drafted taxation system that is fair, effective for investment attraction and aids economic growth and development.

However, India has some challenges with regard to its tax collection structure, especially in corporate tax determination. Corporate tax assessment points out the costs imposed on firms’ wages and salaries by the federal and state authorities. The collection of corporate taxes determines profit levels and informs the expansion decisions made by organisations. Moreover, corporate tax collection also contributes to the government’s revenue and fiscal policy objectives. Therefore, a reasonable, effective, and transparent tax assessment regime for corporations should support economic growth within a nation.

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