Covid-19 Pandemic: Response of the Government through Public Policy Mainly Direct Taxation

International Organisations’ Recommendations [OECD/IMF/UNCTAD]

Tax incentives (Karen, 2017, pp. 6–7, 363) provided important instruments in the hands of the nations to manage fiscal affairs, particularly for the developing countries, which use them to indemnify the gaps in their domestic capital due to shortage of incoming overseas investments. Nations are free to make their tax laws to achieve the intended target of collections without interference from other countries. However, with the growth of liberalisation and globalisation, cooperation at the international level across jurisdictions has come up. This will help in making a global market without any restrictions, also called tax arbitrage, and collective intergovernmental action of the nations is required to tackle the international tax matters. The Organisation for Economic Cooperation and Development (OECD) has become one of the front-runners in this direction. The OECD, created to promote world trade and improving the world economy, came with an initial report (OECD, 2020) in April 2020, followed by its updates suggesting various measures for various countries on using tax as a relief measure in coming out of the Covid situation. It advocated exceptional tax measures for restoration of the economic growth and increasing the falling cash flow in the economy due to the Covid slowdown. The key features suggested by the OECD are as follows:

Increasing the international collaboration for seeking new ways of recovery and providing targeted stimulus to the Covid-affected individuals and entities;

The nations have been advised to synergise their individual capabilities through multilateral collaboration to fight the pandemic in a focused and united manner.

The tax equity (Murphy & Nagel, 2002, pp. 4–8) amongst the different sets of taxpayers is an accepted measure, but its implementation has been a challenge for the governments. Amongst it, the vertical tax equity provides differential treatment of taxpayers who are at different slabs of income, while horizontal equity seeks to provide equal treatment for people falling under the same level. Taking into consideration such equitable measures, the Fiscal Affairs Department of the International Monetary Fund (IMF), looking after the international lending, economic and capacity development, suggests the following on the role of taxation during Covid pandemic conditions:

Taxation to play a progressive and inclusive role to provide a level playing field to small and large taxpayers;

Considering the fact that poor and vulnerable sections of the society have been affected disproportionately during the pandemic, IMF resolved to provide emergency finances to the nations facing fiscal and monetary crisis to tide over the liquidity crunch created due to the ongoing pandemic.

For the developing nations, the economic reforms and technological upgradations are at the core of their transformation (Corea, 1977, p. 177). They need to revisit their old laws and economic structures and intermingle with the global economies for higher income generation. This will lead them to better control over the macroeconomic indicators, monetary and fiscal policy, and external debt management. They can continue their mixed economy set-up but parallelly have to open the doors of the economy to greater liberalisation and globalisation.

Keeping such recommended reforms under consideration, the Secretary General of the United Nations Conference on Trade and Development (UNCTAD) (Kituyi, 2020), the international body entrusted with the task of increasing the capabilities in trade, investment, and development, suggested the following measures for the global economies:

Governments to examine and implement various methods to reignite and stimulate international trade along with a need to keep their markets open and remove unnecessary restrictive trade barriers to create favourable trade conditions;

The UNCTAD advocated a focus on the flow of free trade and for greater cooperation amongst governments, including critical sharing of medical or vaccine assistance on Covid. Apart from suggesting measures for the governments, the role of the private sector has been specially recognised and highlighted for more equitable and sustainable economic growth.

Direct Tax Measures and Their Impact

The tax laws under normal circumstances must be objective (ibid.; Karen 2017) and neutral for all taxpayers without any special treatment to a certain category. However, the local tax administration of the country could undertake special measures for the promotion of investment, development and channelisation of income and resources as set out in the larger public policy of the day.

Growth of Indian Tax Structure

In the budget year 1949–1950, the tax rates were amended for the first time in independent India. The tax policy led to complicated eleven tax brackets for Personal Income Tax (PIT), having the highest rate of 85 per cent with a surcharge of 15 per cent, making it an effective rate of 97.75 per cent for the persons having income more than rupees 200,000 in FY 1973–1974. Similar policy effects were seen on Corporate Income Taxes (CIT) at that time. In a nutshell, a person did not have any incentive or push to earn more and end up paying almost all in taxes.

The tax policy situation took a drastic turn in Budget 1992–1993 when the government brought down the number of taxation slabs to three only with a maximum rate of 40 per cent taxation and it was seen as moderate. A further considerable impact came in the Budget 2017–2018 when the government almost made nil taxation rate for persons earning up to Rupees 300,000. As an unprecedented step, the government, in Budget 2020–2021, introduced a new optional and simplified PIT regime to be chosen by the individual taxpayer at the start of FY, with tax slab rates of 5 per cent (for income from ₹2.5 to 5 lakh), 20 per cent (income from ₹5 to 10 lakh) and 30 per cent for above ₹10 lakh income. Similarly, the rate of CIT effective from 1 April 2019 and onwards was reduced to 22 per cent from the earlier 30 per cent for the corporates not seeking any incentives or exemptions. For the corporates seeking any incentives or exemptions, it remains 30 per cent, but the Minimum Alternate Tax (MAT) rate, for loss making companies, has been reduced from 18.5 per cent to 15 per cent. As an incentive for new manufacturing companies and to promote entrepreneurship in India, the government introduced a new corporation tax rate of 15 per cent applicable separately to such entities.

The progressive approach is visible in gross direct taxes budget collections/outlays in India, rising from Rupees 155 crore in FY 1949–1950 to Rupees 68,305 crore in FY 2000–2001 and Rupees 12.06 lakh crore in FY 2020–2021.

Direct Tax Measures in the Covid Period

The CBDT of the Government of India, the body responsible for the management of direct taxes in India, took immediate steps to negate the effects of falling economic growth on account of nationwide lockdown in March 2020. The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 was brought, which addressed the issues related to the strict timelines provided under the Income Tax Act, 1961. The important steps were briefly given as under (CBDT, 2020):

The time period for savings under Section 80C falling under Chapter VIA of the Income-tax Act, 1961 for FY 2019–2020 extended from 31 March 2020, to 30 June 2020;

On one hand, the faster tax refunds placed the money in the pocket of the taxpayer battered by the pandemic, while on the other, the faceless compliance management provided hassle-free electronic access and response without the requirement of any physical presence. A downward alteration in the rate of taxes helped substantially in lowering the cost of living for the people while any rise in tax rates would entail an overall price rise and, therefore, a balancing act is the challenge for any tax administration and more so during the challenging times.

Some sections of the Indian media reported that the direct taxes collections have not only fallen drastically in the FY 2019–2020, but the tax-to-the-GDP buoyancy has also become negative. Though the direct taxes collections fell in FY 2019–2020 compared to FY 2018–2019; however, the same was temporary, expected, and attributable to historic direct tax reforms brought in India, and higher refunds given to the taxpayers. An amount of ₹1.84 lakh crore was issued as direct taxes refunds in FY 2019–2020, which is 14 per cent higher as compared to the last FY 2018–2019.

‘FORCE’ (Fiscal Options and Response to Covid-19 Epidemic) Report and Its Impact

When a crisis is faced in any country, it responds through significant stabilisation and redistribution measures (Pesuth, 2015, pp. 157–170), especially through taxes. Considering the unprecedented situation, some fifty officers of the Indian Revenue Service (IRS Association, 2020) submitted a report to the Government giving various recommendations on the mobilisation of revenue and bringing back the economic momentum to battle the Covid. After analysing the impact of the Covid on the India and world economies, the report, inter alia, recommended the following taxation measures:

As a short-term measure for generating extra resources, it suggested the raising of direct taxes to 40 per cent for the ‘super rich’ individuals on their total income or reintroduction of the wealth tax on net worth more than Rupees 5 crore.

The report contained vast and revolutionary ideas on the handling of the economy through the intervention of direct tax measures. It skilfully listed the global tax administration response to fight the Covid pandemic. Various suggestions contained in the report were seen as already implemented by the government in some form or the other. However, the report lacked coherence in the presentation of the ideas and arriving at tax impact for each suggested measure. As per the famous Laffer curve (Pesuth, 2015), with increasing rates of taxation, beyond a certain point, the tax revenue was bound to fall as the unwilling taxpayers would start taking steps for tax evasion rather than paying extra taxes. The reverse approach, though not supported by empirical evidence, suggested that a lowering down of tax rates would increase the optimal tax revenues.

The Economic Survey 2020–2021 and Its Impact Analysis

The Economic Survey (Ministry of Finance, 2021) stated Covid-19 as a once-in-a-century crisis. As per the survey, due to falling revenue on account of slow economic activity, the government decided to increase market borrowings to ₹12 lakh crore from an earlier permissible limit of ₹7.8 lakh crore. The important steps mentioned in the economic survey with regard to direct tax interventions are as follows:

Reforms for better transparency, responsibility and compliance with the underlying notion of ‘honouring the honest’ taxpayer launched in August 2020.

The classical theory of economics propagated the idea of public policy intervention for stabilisation of the market and economic growth (Salik, 2018, pp. 116–127). In any welfare State, the large government enterprises were expected to contribute towards capital formation and income generation as they were considered stable and less vulnerable to business fluctuations. However, with expanding and opening economies, the increasing needs of finances were to be met through progressive taxation and government loans. The negative effect of an increase in government loans was the perpetual deficit budgets, and the country might end up entering into a cycle of recession. To overcome this situation, the government had to resort to greater and targeted social spending and putting the money directly in the pockets of the people.

Overall Impact of the Measures

The above taxation relief and good governance measures proposed by the government are expected to spur the dwindling revenues and bring the confidence of the taxpayer in the country. The government brought the Fiscal Responsibility and Budget Management (FRBM) Act in the year 2003 for the management of fiscal deficit, imposing a financial restraint and going for prudent budget practices. Going by the path laid down by this Act, the government would have to bring down the fiscal deficit to 3.1 per cent of the GDP while eliminating the primary budget deficit altogether by FY 2022–2023; however, the occurrence of Covid spoiled the plan and fiscal deficit projected for the FY 2021–2022 was pegged at 6.8 per cent of the GDP, which was lower than the last financial year’s comparative figure of 9.5 per cent. The higher fiscal deficit was the need of the hour as the government would be having lower taxes and other collections, and it had to borrow money from the market to keep the momentum of higher public spending. As a positive indicator during the unpredictable times, as an ongoing fiscal strengthening and consolidation plan, the government planned to bring down the fiscal deficit down to 4.5 per cent of the GDP by the FY 2025–2026.

A downward alteration in the rate of taxes helped substantially in lowering the cost of living for the people while any rise in tax rates would have entailed an overall price rise, and therefore, the balancing act was the challenge for any tax administration and more so during the challenging times.

Direct taxes collections during FY 2019–2020 fell 8 per cent below the target; however, it was more due to a 14 per cent increase in the refunds vis-à-vis previous FY 2018–2019 and the slowing down of economic activity due to the outbreak of Covid-19 in India in February 2020. The direct tax collection target was also reduced by the government from Rs 1,335,000 crore to ₹1,170,000 crore to reduce pressure on the tax administration and to acknowledge the effect of the slowdown of business activity.

The direct tax budget collection target for FY 2020–2021 was kept low by the government at Rupees 905,000 crore and corresponding collection exceeded by five percent during the year. The highest ever refunds of Rupees 261,000 lakh crore were issued during the year to provide more money in the hands of the taxpayers to reignite the demand/supply cycle of the economy and sustaining the livelihood of small taxpayers by giving them timely refunds.