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Tax reforms in India lag behind growth
June, 20th 2011

Taxation reforms in India have not kept pace with economic growth, leading to the problems of tax evasion and money laundering and resulting in an estimated $1.4 trillion of black money, an expert said.

"In India, tax reforms have lagged behind growth. It is a big challenge for politicians and policymakers to keep the pace of reforms with growth," Jeffrey Owens , director of the OECD (Organisation for Economic Cooperation and Development) Centre for Tax Policy and Administration , told IANS during a visit to New Delhi.

He said high tax rates and loopholes in policies led to huge black money in India, which is mostly stashed abroad.

According to unofficial estimates, the quantum of Indian black money ranges from $450 billion to $1.4 trillion.

"Indian economy has transformed in the last two decades. Along with high growth, it has increasingly become importer and exporter of capital. But tax regulations have largely remained the same. You have to change with the changing environment," the OECD official said.

Owens said the proposed tax reforms would help plug loopholes in the system and boost growth.

India plans comprehensive reforms in both direct and indirect tax regulations. The government aims to replace the archaic Income Tax Act, 1961, with a simplified norm called Direct Tax Code (DTC) from the beginning of the next financial year.

The DTC Bill, that aims at reducing tax rates but expanding the tax base by minimising exemptions, was introduced in parliament in August last year. However, the bill has not been passed yet.

Under the new tax regime, the government proposes to introduce measures that would help curb tax evasion and black money. It proposes to bring into the tax net all passive income earned by residents from substantial shareholding in companies situated in the low tax jurisdictions, often referred to as tax havens.

Assessees are also required to furnish details of their investment and interest in any entity outside India.

Finance secretary Sunil Mitra said recently that the reformed tax regime would help bring back the ill-gotten money stashed abroad.

To reform the indirect tax regime, the government proposes to introduce a unified Goods and Services Tax (GST). It seeks to bring uniformity in indirect tax structure across the country by replacing the excise duties, services tax, value-added-tax, state surcharges and local levies with a unified tax rate.

Originally, the GST was planned to be introduced from April 1, 2010, but it has been delayed because of stiff opposition from the Bharatiya Janata Party ( BJP ))-ruled states.

The new tax regime is unlikely to be implemented soon, given the rift between the federal government and opposition-ruled states.

Owens said the proposed reforms would boost the government's revenues and economic growth.

According to him, the focus of the reforms should be on broadening the tax base and reducing dependence on direct taxes. "The focus should be on consumption tax and property tax. Corporate taxes need to be reduced and the tax base broadened," he said.

Owens said that to attract more foreign investment, India needs to bring stability and predictability in its tax regime.

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