Budget 2022 will aim to stem tax litigation, increase compliance

Among the steps under consideration are amendments to a dispute resolution scheme announced last year; clarificatory amendments to both Income Tax Act and indirect tax laws to make doing business easier; and increasing reporting requirements under various provisions to further aid non-intrusive tax administration, a person familiar with the discussions in the government said.

The broad idea is to make tax administration simpler and get the departments more access to information related to transactions while facilitating voluntary compliance, the person said. The income tax department has been encouraging digital payments and has gradually expanded the levy of taxes to be collected or debited at source to track transactions in the economy.

The government may also tweak the contours of a dispute resolution scheme announced last year for small taxpayers to make it more attractive, said the person, who spoke on condition of anonymity. The scheme was announced for small taxpayers with an income of less than Rs. 50 lakh, for disputed income less than Rs. 10 lakh.

The emphasis on improving tax compliance comes at a time both the direct and indirect tax administrations have tasted success in leveraging technology and data analytics to nudge assessees to report their tax liability correctly and in checking tax evasion.

Centre’s net direct tax collection touched ₹9.45 trillion as of 16 December, growing 60.8% from the year-ago period and 40% compared to the comparable period in the pre-pandemic year of FY20. Goods and Services Tax (GST) collections, on the other hand, has been around ₹1.3 trillion in October, November and December. The tax buoyancy points to the effectiveness of the compliance enforcement efforts, backed by strong nominal GDP growth.

In the government’s pre-budget consultations, experts have highlighted the need for easing rules on deposits needed to file appeals in GST disputes and to make clarifications on GST registration related matters. At present, the GST law requires taxpayers to deposit the full amount of admitted liability and a fraction of the disputed tax liability at the time of filing appeals, for which tax credit cannot be used. The suggestion is to allow the use of tax credits for this requirement. Businesses have also sought clarifications on norms relating to the cancellation of GST registration. Rules say that GST registration can be cancelled for not filing returns for six months continuously. This was relevant when returns were filed only monthly, but now, a scheme allows quarterly return filing with monthly tax payments and requires an amendment. In the case of small taxpayers registered for the composition scheme too, now periodicity of return filing has changed from quarterly to annual, and only tax is paid quarterly. Boosting tax compliance is a priority for the government, given the historically low compliance levels. India’s tax-GDP ratio is around 10% compared to 25-26% in the case of some of the developed economies.