by Mr. Pranav Bafna, An Alumni of ILS Law College, Pune
Benjamin Franklin had famously once said, “In this world nothing can be said to be certain, except death and taxes”. With the world ravaged by a pathogen induced pandemic, this quote exposes a harsh reality of life. The fear of losing one’s life does take precedence over the fear of losing one’s livelihood. However, life cannot sustain without resources to protect oneself. The role of commerce in sustaining life as well as sustaining the government is a reality we all must accept.
Commerce shares a symbiotic relationship with the government as well as its people. For the people, it provides a livelihood for sustenance and for the government, it provides resources to securely the orderly sustenance of human life. Indirectly, both serve the same purpose – supporting the existence of human life.
With India entering into a new phase in its crusade against the Coronavirus, the government’s emphasis on ‘Jahaan’(livelihood) along with ‘Jaan’ (life) highlights the inescapable importance of an actively functioning economy. Devoid of resources, the government can neither protect human life, nor ensure the welfare of its people.
With taxes being a key contributor to India’s fiscal well-being, it is going to play a major role in weathering the ongoing crisis. Therefore, through this submission, the author seeks to explore how India’s tax regime can be a knight in shining armour at times of crisis. The submission will examine the role of taxation in ensuring a sustainable economic revival at the ‘Macro-Level’ as well as ‘Micro-Level’.
ROLE OF TAXATION AT A MACRO LEVEL
Lessons from war finance–
The ongoing war against a microscopic virus shares a lot of similarities with the great battles of yester years. No man can ever predict how long either of the wars will continue or just how far it will lead. War is a very uncertain venture and the only prudent thing for a nation to do in adopting a program of war finance is to prepare for a contest of unlimited magnitude and indefinite duration.Today’s economic crisis shares the same uncertainty.
A recent report by the Organization for Economic Co-operation and Development (OECD) estimates that for each month of containment there could be a loss of 2% of Annual GDP. Thus, with a dwindling economic growth, tax revenue is going to take a sizeable blow as well. Leaving countries with inadequate resources to fight one of mankind’s greatest battles.
To counter this economic regression, a group of tax officers had submitted a report titled ‘FORCE’ (Fiscal Options & Response to COVID-19 Epidemic’) on 23rd April, 2020. The said report, inter alia, focused on financing the economic stimulus through a 40% tax on the super-rich, reintroducing wealth tax, and imposing an additional “Covid-19 Cess”. While the philosophy behind this report might have drawn inspiration from the fictional tales of Robin Hood, it lacked evidentiary value. Although the report generated a lot of buzz in the media, the government did the right thing by rejecting it.
To avoid digging its own grave, the government would be well advised to take a leaf out of the history books. With limited fiscal flexibility, the Napoleonic Wars of the 18th century were majorly financed through higher taxes. Eventually, not only did Napoleon lose the war to Russia, it’s economy was left devastated. Economists have argued that financing wars through higher taxes had left France high and dry in its narrow-minded lust for political supremacy. Higher rates of taxes had stifled consumption and lower consumption led to a lower level of demand. Alas, with demand unable to bounce back, they failed to collect adequate taxes. Thus, France failed to finance its wars adequately due to a tax-dependent economy.
Financing the Economic Stimulus–
The government of India has sanctioned an ambitious Twenty Lakh Crore Rupees economic stimulus under the “Atmanirbhar Bharat Abhiyan”. The said package roughly amounts to ten percent of India’s Gross Domestic Product. The Government might appear fiscally imprudent in this bold step. However, it has tactfully structured the stimulus to reduce the burden on fiscal deficit. In this regard, it is pertinent to note that the government’s plan to finance this stimulus is still unclear.
Having argued against an increase in tax rates, the author firmly believes that the future tax policy must be coordinated with other policy levers. In other words, the healthcare, trade, social and labour market, fiscal and monetary policies must share the burden in reviving the Indian economy rather than India’s tax policy being the one stop shop. For instance, the step to disallow global tenders in government procurement tenders upto Rupees Two Hundred Crores was a step in the right direction. By creating an exclusive market, the government has consolidated the demand for locally manufactured goods. Thereby ensuring that local businesses don’t lose out to their – resourceful – foreign counterparts.
The Fiscal Responsibility and Budget Management Act, 2003 was enacted with the objective of managing the fiscal deficit. It mandated the government to take appropriate measures to limit the fiscal deficit upto three per cent of gross domestic product by the 31st March, 2021. With the Fiscal Deficit, prior to Covid-19 touted at 3.8%, India’s central fiscal deficit is expected to widen to 7% as a consequence of the pandemic.
Alas, the government will have to get crafty in its plan to finance this hefty stimulus package. In this regard, raising taxes should certainly not be considered as an option. Thus, the Ministry of Finance has its work cut out as far as managing its ‘Macros’ is concerned.
ROLE OF TAXATION AT A MICRO LEVEL
Cash Flow and Taxation-
The interrelationship between cash flow cycles and taxation is the pivot of any taxing statute. Although cash flow is an accounting concept it plays an important role for businesses in their quest for continuity. For legal professionals, any tax advice without due regard to business cash flows would be misleading at best.
In this regard, it is important to understand the two accounting concepts of liquidity and solvency. Solvency refers to an organization’s ability to service its debts over the long run. Excess of total liabilities over total assets, would take a business on the brink of insolvency. i.e. complete shut-down of operations. Liquidity, on the other hand, refers to an organization’s resourcefulness to procure cash in exchange of its assets, immediately, and meet its obligations on a short run basis. The ability of a business to pay salaries, taxes, rents and other short term – recurring – obligations determines if an organization has enough liquidity. i.e. money to function on a near term basis.
Usually, levy of income tax arises from any income generated through purchase and sale of goods or services. It has a significant impact on the liquidity of a business. For profits generated from every commercial transaction, a business is expected to pay income tax immediately or on a near time basis. With Covid-19 stalling inflow of cash revenue, an organization’s ability to fulfill its tax obligation has completely debilitated. Therefore, it is imperative that prospective tax policies take cognizance of the liquidity crunch faced by enterprises across the board.
Tinkering with Income Tax Laws to withstand the Liquidity crunch-
With a strong decline in consumer as well as business demand, many businesses are at the risk of going bankrupt even in the presence of substantial cash reserves. Such a situation could arise for many businesses having a high quantum of fixed recurring costs which could squeeze out the cash reserves sooner, rather than later. In such instances, the corporate tax system must try to enhance the liquidity and solvency of businesses by deferring tax payments. Thereby reducing pressure on the minor amounts of cash generated by a business in times of a liquidity crunch. A shift in the timing of tax liability is akin to granting interest free loans. Thus, shifting payment due dates would provide a much needed support to businesses on a temporary basis.
In India, taxpayers are expected to pay a significant portion of their tax liability through advance taxes on a quarterly basis as well as through tax deducted at source (‘TDS’) on an accrual basis. By deferring advance tax due dates as well as through reducing rates of TDS, the government would be reducing the pressure on cash reserves of business entities. While a reduction in income tax rates could have been the ideal solution to stimulate demand, India’s fiscal constraints forbade the government from writing off tax dues.
In this regard, the government has already proposed a twenty five percent reduction in TDS Rates for Financial Year 2020-21 under the “Atmanirbhar Bharat Abhiyan”. Further, to enhance the amount of cash with households and businesses, the government has expedited the grant of refunds to a large section of taxpayers. To ease the compliance burden on taxpayers, due dates for filing of all Income Tax returns has also been pushed to 30th November, 2020. Although the aforementioned solutions sousnd appeasing in nature, its viability is limited to the crisis phase. As and when the Indian economy moves out of the crisis phase, the government will have to ensure that its fiscal policy plays a more proactive role in stimulating demand. Keeping a check on tax and surcharge hikes, leaving more cash in the hands of the taxpayer rather than the tax collector would be advisable.
The exposure to financial and health risks of the pandemic is highly unbalanced. The vulnerable households and workers are likely to have the greatest exposure to the pandemic. Exposure to income risks as well as employment risks due to the lockdown are also unequal. Since, “Working From Home” is largely possible only for highly-skilled and high paying jobs, the lower and middle stratas of society are at a much greater risk of unemployment.
Therefore, any tax policy in the recovery phase must first benefit the lower sections of society as well as the middle class. Both being major contributors to India’s economic cycle. By putting more discretionary income in the hands of the people rather than the government, India can boost consumption and revive the economy at a much faster pace.
Consequently, with an expanding economy, the tax base ought to widen. Undoubtedly, with a larger tax base at its disposal, the government’s tax collection ought to increase as well. In other words, the road to greater tax collection lies in broadening the tax base rather than squeezing out the existing tax payers. One of the ways to broaden India’s tax base could be legalizing, regulating and taxing betting. Federation of Indian Chambers of Commerce & Industry (‘FICCI’) estimates the betting industry in India to be worth three lakh crore. It reckons that the government is inadvertently forfeiting a windfall gain to the tune of Rs. 19,000 crore in Tax revenue every year by rendering sports betting illegal. To put it in perspective, the one time exercise of PM Cares Fund has collected in excess of Rs. 9,677.9 crore so far.
As India’s crusade against the coronavirus gathers momentum, the need for funds to wage the war will also increase. With doctors in the hospitals doing a commendable job of saving thousands of lives, it is time for the financial doctors to save thousands of livelihoods. India’s present might be controlled by the pandemic, but India’s future will be decided by its ability to revive the economy. Unquestionably, Income Tax will be a key weapon in this crusade.