CLA News / Strengthening tax transparency and anti-avoidance measures in India: challenges and future outlook by Dr. Sunil Dutt Chaturvedi

I. Introduction

Over the last decade, India has made great progress in upgrading its tax environment, with an emphasis on increasing transparency and putting in place strong anti-avoidance tools. These initiatives seek to address tax evasion, curb black money, and guarantee that domestic and international corporations pay their fair share of taxes. This essay investigates the existing environment of tax transparency and anti-avoidance in India, the problems encountered in implementation, and the future prospects for tax changes.

II. Evolution of Tax Transparency in India

In 2015, India began its road towards greater tax transparency with the introduction of the Income Disclosure Scheme and the Black Money Act. The implementation of the Goods and Services Tax (GST) in 2017 was a watershed moment, resulting in a unified digital tax environment that dramatically increased indirect tax transparency. The approval of the OECD’s Base Erosion and Profit Shifting (BEPS) action plans has reinforced India’s commitment to international tax cooperation. The implementation of Country-by-Country Reporting (CbCR), Master File, and Local File requirements has increased visibility into multinational firms’ activities and tax contributions across countries.

III. Current Framework and Implementation

1. International Compliance Measures

India has implemented various international compliance procedures to improve tax transparency. The government has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which allows for the automated sharing of information with more than 100 other jurisdictions. India uses the Common Reporting Standard (CRS) to collect financial account information from partner nations concerning Indian residents’ abroad accounts. India reciprocates by sharing information about foreign residents’ accounts with their home nations. India has adopted Country-by-Country Reporting (CbCR) requirements for multinational firms with consolidated turnover over ₹6,400 crore under BEPS Action 13. This requires thorough jurisdiction-wise reporting. India has improved its tax treaty network by including anti-abuse measures through the Multilateral Instrument (MLI), which allows covered tax accords to be modified without requiring bilateral renegotiation. The Foreign Account Tax Compliance Act (FATCA) agreement with the United States permits the transmission of financial information regarding US citizens having accounts in Indian financial institutions, and vice versa. India’s Advance Pricing Agreement (APA) scheme gives clarity on transfer pricing concerns, while the Mutual Agreement Procedure (MAP) facilitates the resolution of double taxation challenges. These initiatives establish a strong foundation for international tax compliance, considerably improving India’s capacity to combat cross-border tax evasion and avoidance.

2. Domestic Anti-Avoidance Measures

1. General Anti-Avoidance Rules (GAAR): GAAR, which was implemented in 2017 after multiple delays, authorises tax authorities to scrutinise agreements that appear to be primarily intended for tax avoidance purposes. This principle-based approach allows regulators to go beyond the legal structure of transactions and analyse the substance.
2. Specific Anti-Avoidance Rules (SAAR): SAAR target specific transactions, such as limiting the carry-forward of losses in the event of a change in ownership, taxing gifts, and disallowing certain expenditures to avoid income leakage.
3. Controlled Foreign Corporation (CFC) Regulations: While India has not fully implemented comprehensive CFC laws, the Place of Effective Management (POEM) concept performs a similar role by evaluating tax residence depending on the location of important management decisions.
4. Transfer Pricing Regulations: India has strict transfer pricing rules that mandate arm’s length pricing for related-party transactions. The Advance Pricing Agreement (APA) scheme has successfully provided predictability to taxpayers while assuring proper tax collection for the government.
5. Equalization Levy and Significant Economic Presence: To address the issues of taxing the digital economy, India implemented the Equalisation Levy in 2016 and plans to expand it in 2020. The notion of Significant Economic Presence was created to tax non-resident digital enterprises with considerable economic operations in India, even if there is no physical presence.

IV. Implementation Challenges

1. Administrative Capacity: The tax administration confronts difficulties in developing technical skills, especially in complicated areas like as transfer pricing and digital taxes. Resource limits sometimes hinder the efficacy of enforcement, particularly for sophisticated tax planning systems.
2. Litigation and Dispute Resolution: India continues to face a significant number of tax disputes. The time it takes to settle disputes reduces business certainty and puts a burden on administrative resources. Despite initiatives such as the Vivad Se Vishwas Scheme, the backlog remains significant.
3. Balancing Enforcement and Ease of Doing Business: Excessive use of anti-avoidance tactics might generate confusion and disrupt lawful corporate activities. Finding the correct mix between aggressive enforcement and maintaining an appealing investment climate remains challenging.

V. Policy Recommendations

1. Establish a centralised beneficial ownership record that requires the disclosure of all persons with substantial influence over entities, as well as tight verification methods and penalties for noncompliance, to prevent shell corporations and finance roundtripping.
2. Use advanced data analytics and artificial intelligence (AI) technologies to detect tax evasion tendencies by cross-referencing GST filings, customs data, income tax returns, property registrations, and high-value transactions for risk-based enforcement.
3. Create specialised tax courts with judges skilled in international taxes and digital economy concerns to speed up dispute settlement, supplemented by required alternative dispute resolution options for instances below certain thresholds.
4. Reform transfer price documentation standards to guarantee that transactions involving low-tax nations are automatically flagged, with presumptive adjustments made until taxpayers submit adequate evidence of arm’s length pricing.
5. Develop a blockchain-based invoice authentication system for B2B transactions to avoid fraudulent invoicing and input tax credit fraud, while also providing an immutable audit trail that tax authorities may access in real-time.
6. Improve international collaboration by expanding automatic exchange agreements and collaborative audit protocols with important business partners to identify cross-border tax evasion arrangements more efficiently.
7. Introduce mandatory disclosure regulations that require taxpayers and intermediaries to reveal potentially aggressive tax planning arrangements, with high fines for failure to disclose, in order to offer early notice of burgeoning avoidance schemes.
8. Establish a uniform taxpayer compliance grading system based on filing history, audit findings, and payment timeliness, with streamlined processes for high-compliance taxpayers and increased scrutiny for high-risk companies.
9. Create a comprehensive digital economy taxation structure that includes explicit nexus laws, streamlined registration processes for non-resident digital service providers, and automatic withholding mechanisms for cross-border digital transactions.
10. Create a designated tax transparency ombudsman to address systemic difficulties in tax administration, protect whistleblowers exposing tax fraud, and ensure procedural fairness in the implementation of anti-avoidance measures.

VI. The Road Ahead: Future Outlook

1. Two-Pillar Solution to Digital Taxation: India has joined the global agreement on the OECD’s Two-Pillar plan for taxing the digital economy. Pillar One reallocates taxing authority to market states, whereas Pillar Two establishes a worldwide minimum tax. The introduction of these regulations will fundamentally change India’s approach to taxation multinational corporations.
2. Faceless Assessment and Appeals: The faceless assessment scheme, which was implemented in 2019 and expanded in succeeding years, uses technology to decrease human interaction in tax processes. This effort shows potential for boosting efficiency and eliminating corruption; yet, implementation issues persist.
3. Data Analytics and AI for Compliance Monitoring: The use of sophisticated analytics and artificial intelligence to detect tax concerns and improve compliance is expected to grow. The Project Insight and Advanced Data Processing for Information Exchange and Analysis (ADPIEA) programs are first moves in this direction.
4. Tax Simplification: The ongoing attempts to simplify tax rules and processes, including future modifications of personal and corporate income tax structures, are crucial for enhancing voluntary compliance and minimising evasion options.

VII. Conclusion

India has made significant progress in improving tax transparency and anti-avoidance measures, matching with global norms while adjusting to its specific economic circumstances. However, issues with implementation and enforcement continue. The future of India’s tax system will be determined by its ability to harness technology, improve administrative capacity, simplify dispute settlement, and strike a balance between enforcement and business-friendly policies. As India establishes itself as a global economic power, a strong yet equitable tax structure that promotes transparency while remaining competitive will be critical for long-term economic growth and budgetary stability. The current changes and international collaboration in taxes will play a critical role in determining this future.

Dr. Sunil Dutt Chaturvedi, Assistant Professor, Institute of Legal Studies, Shri Ramswaroop Memorial University, Barabanki, Uttar Pradesh, India

Mobile No- +917379003575 (WhatsApp), +916306121156

Email- sunilduttchaturvedillb@gmail.com