India’s taxation policies and scope for reforms

STEP Balancing between powers of state and citizen’s moral obligation is the need of the hour

An o l d U S S u p r e me Court d e c i s i o n s e t forth the dictum: “The power to tax involves the power to destroy…” This is, unfortunately, a perception that has been amplified by a recent series of events defining and shaping the Indian tax landscape. The term tax terrorism was coined in 2014 to describe t he a dversari a l a pproach adopted by tax authorities. The phrase has since gained traction, is perceived to be the rule rather than an exception, and is now c o mmonly d i s c us s e d across forums..

Retrospective amendments to the law, fishing inquiries conducted by tax departments, the imposition of unrealistic tax targets on field officers leading to high assessments, aggressive collection measures such as provisional at t achment of assets (even before completion of the final assessment), and prol onged l i t i gat i on have fuelled the perception of tax terrorism. One could perhaps tone the phrase down to tax aggression.

In the wake of recent events, the corporate world has united, sharing stories of the continued harassment they have faced at the hands of tax authorities. Of course, one could and should be wary of these reports because of inevitable exaggerations and a reluctance on the part of sections of the corporate world to pay their fair share of taxes.

At its root, there does lie an element of tax aggression. The g o v e r n ment ’ s proactive response to these reports has been to suspend senior tax officers, relieve them of their duties and hold out assurance that fishing expeditions will not be conducted.

Global trade and tax wars are having an impact on the Indian e c o nomy, a nd g r o wth has

slumped to a more than six-year low. In order to alleviate the situation, the finance minister, in her recent interactions, has highlighted 32 action points which the government is pursuing to improve the ease with which people conduct business. Some of these action points are also aimed at curbing in stances of tax aggression such as the withdrawal of an angel tax for registered startups, implementation of a new centralized computer system for issuing income-tax orders, notices and summons with a unique document identification number (DIN) effective from October 1, clearance of Goods and Services Tax (GST) refunds within 30-60 days, and faceless or e-assessments.

Are these measures going to be sufficient? For this, let us start at the root cause of the problem. A successful tax policy is based on four canons of taxation -- equality, certainty, convenience and economy.

Among the four canons, the Indian tax law is perhaps weakest when it comes to the canon of certainty.

India has a complex tax rate system -- different tax rates for manufacturing companies and c o mpanies wit h t urnover thresholds (which vary from year to year); short-term and long-term capital gains rates vary for different capital assets;, tax on dividend income and different rates for non-residents, the list goes on.

These circumstances are further aggravated by the complexity of varying surcharge rates for corporate and non-corporate e nt i t i e s , and f or di f f e r e nt streams of income. The government could consider providing a simplified tax rate system which provides more certainty and is easier to comply with.

Additionally, in India, the distinction between policymaking and legislative drafting has become blurred. The country is in dire need of a modern and sophisticated tax law, which will require expert draftsmen to codify policy decisions taken by the government.

Rigorous and expert legislative drafting will also help in improving policymaking by identifying gaps in the proposed laws and enabling policymakers to address them in a timely manner. One hopes that the proposed Direct Taxes Code (in its new guise) will live up to these expectations.

Another aspect that emerges f rom t he recent s urcharge increase on the super-rich is the need for a larger public debate before proposals are enacted. For instance, it appears that the increased surcharge was not intended to apply to Foreign Portfolio Investors set up as trusts; yet this could not be addressed given the exigencies and time constraints of the legislative process.

While the need for confidentiality and speed may occasionally be warranted, in most cases, a wider and more far-reaching public debate prior to the passage of Bills by Parliament will help address unintended anomalies and assist in the framing of better laws.

Some other measures which could be explored for developing a robust taxation framework could be building accountability on the part of the tax administration through the introduction of a Tax Ombudsman.

This will not only facilitate redressal of taxpayer grievances but also help in the timely identification of and reporting on systemic problems faced by taxpayers after consultation with taxpayers and industry representatives.

A s yst e m s hould al s o be developed in which the taxpayer and the assessing officer can jointly refer questions of law and interpretation to a specified senior officer in the Central Board of Direct Taxes/central Board of Indirect Taxes and Customs , tasked with ensuring the consistent application of tax l a ws, r ul e s a nd c i r c ul a r s throughout India. In cases of existing litigation, a scheme for enabling an out-of-court settlement mechanism could also be explored, and other measures such as improving the efficacy of the Authority of Advance Rulings would go a long way in providing tax certainty for foreign investors.

A p r o c e s s c o ul d a l s o b e defined whereby the performances of the senior tax officials are measured on the basis of annual increase in the number of taxpayers under their jurisdiction, rather than tax collections alone.

The government would be best served by a broad tax base, equitable and fair taxes, and an administration where no personal bias and inefficiencies exist.

At the same time, developing a t a x - c o mpli a nt nat i o n is equally important for tax policy. This can only be realistically achieved when taxpayers view taxes as reasonable and just, and in accordance with the government’s obligation to adequately deliver public goods and services. Creating a balance between the powers of the state and the citizen’s moral obligation is therefore the need of the hour.

THE GOVERNMENT WOULD BE BEST

SERVED BY A BROAD

TAX BASE, EQUITABLE AND FAIR TAXES, AND AN ADMINISTRATION WHERE NO PERSONAL BIAS AND INEFFICIENCIES EXIST