Tax Can Be An Incentive

Relevance: GS 2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation; GS 3 - Mobilization of resources; GS 4-Corporate Governance

(Source: Indian Express, 07/25/23)

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Why in the news?

The article discusses the importance of tax transparency as a catalyst for sustainable growth and proposes a voluntary tax transparency framework for organizations operating in India [as a global economic powerhouse and the challenge of nurturing sustainable growth as the country aims to surpass the $5 trillion milestone in its economy.

How can the Voluntary Tax Transparency Framework help India?

• A voluntary tax transparency framework would encourage organizations operating in India to disclose their tax strategies and approaches toward domestic and international taxation.
• This would help to ensure that all companies are paying their fair share of taxes, regardless of size or nationality.
• Attract foreign capital: It would also help to attract foreign investment, as investors are increasingly looking for companies that are transparent and have a strong commitment to sustainability.
• The resulting influx of capital would create job opportunities, stimulate economic expansion, and promote investments particularly in sectors such as infrastructure and green energy.
• Sustainability: The framework could be linked to the ESG framework, which would make it a standard that every company follows to demonstrate its commitment to sustainability.
• Contribution to India’s growth story: Tax transparency would serve as a litmus test to gauge the contribution of each company to India's growth story and provide valuable insights into the tax strategies of corporations.
• Promote competition: A voluntary framework could encourage healthy competition among companies by encouraging them to share their tax strategies and employ responsible tax procedures to raise their ESG ratings.

How will it help companies?

• Aligning with environmental goals: Companies can report environmental taxes related to carbon emissions, plastic usage, waste management, and water consumption.
• Businesses can be encouraged to adopt greener practices, aligning economic growth with environmental goals.
• For, example if a company pays taxes on carbon emissions, it may be more likely to invest in renewable energy or energy efficiency measures.
• Social contribution: The social dimension of tax transparency reporting could shed light on a company's contribution towards aspects such as social insurance, healthcare, and pension premiums.
• Aligning with ESG policies: Companies can align their ESG policies with tax behavior by enhancing tax reporting and increasing stakeholder communication.

Steps need to be taken by India

• Transparency must extend beyond financial disclosures to encompass a broader spectrum including environmental practices, social contributions, and governance policies of an organization.
• India can establish a voluntary framework for companies along the lines of tax transparency reports (TTR) to solidify its economic base and cultivate a business environment centered around integrity.
  • Tax Transparency Report (TTR) is an annual report providing an overview of tax strategy, governance, and tax contributions made by a particular corporate group to the government.

Conclusion

• The Securities Exchange Board of India has introduced the Business Responsibility and Sustainability Report (BRSR) Core, aimed at enhancing the reliability of ESG disclosures by the top listed companies.
• As India races towards surpassing the $ 5 trillion milestone, accompanied by a growing per capita income, a noticeable shift in consumer behavior led by the younger generation is emerging.
• Tax transparency, which falls under the broader umbrella of ESG, will carry considerable importance in influencing the choices of the younger generation.
• The need for tax transparency is urgent, but the framework must be in sync with India's commitment to facilitate the ease of doing business.

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FAQs

MCQ

Question: Consider the following statements:

1. Business Responsibility and Sustainability Reporting (BRSR) framework was introduced by SEBI.
2. The BRSR disclosure is mandatory for the top 1,000 Indian listed companies by market capitalisation from FY2023 onwards.

Which of the above statements is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2