The case for sim­pler tax laws

The govern­ment should bring in a new Direct Tax Code to end the cur­rent am­bi­gu­i­ties, usher in a tax­payer-friendly en­vi­ron­ment and im­prove ease of do­ing busi­ness

Business Standard - - OPINION - VIKAS VASAL

The idea of a new Direct Tax code (DTC) has been in the works since 2009. Al­most af­ter eight years of pur­suit, the idea was given a burial by the fi­nance min­is­ter in his Bud­get speech in Fe­bru­ary 2017. The idea got a fresh lease of life within a span of six months, when a task force was con­sti­tuted in November 2017 to give its rec­om­men­da­tions on the cur­rent tax regime and how to align it with the needs of a dynamic and fast-grow­ing econ­omy.

The task force was di­rected to give its rec­om­men­da­tions keeping in mind as­pects such as the tax sys­tem preva­lent in var­i­ous other coun­tries, in­ter­na­tional best prac­tices, and the ex­ist­ing tax pro­vi­sions vis-à-vis the cur­rent eco­nomic needs of the coun­try. While the ob­jec­tive is to up­date the tax laws to meet the needs of the cur­rent busi­ness en­vi­ron­ment, this would also be a good op­por­tu­nity to revisit some of the ex­ist­ing pro­vi­sions of the In­come-tax Act, 1961, es­pe­cially those that have out­lived their pur­pose and re­quire re­con­sid­er­a­tion.

One such pro­vi­sion is sec­tion 43B, which was in­tro­duced by the Fi­nance Act 1983. Un­der this pro­vi­sion any sum payable by way of tax, duty, cess or fees un­der any law for the time be­ing in force and any sum payable by an em­ployer as con­tri­bu­tion to any prov­i­dent fund or gra­tu­ity fund or any other fund for the wel­fare of em­ploy­ees is al­lowed only on ac­tual pay­ment, de­spite the tax­payer fol­low­ing the ac­crual ba­sis of ac­count­ing. Ex­penses such as bonus, com­mis­sion or leave en­cash­ment payable to em­ploy­ees, in­ter­est on any loan or bor­row­ing from a pub­lic/state fi­nan­cial in­sti­tu­tion or a sched­uled bank, are also cov­ered un­der this pro­vi­sion.

Sim­i­larly, the In­come-tax Act also has pro­vi­sions wherein de­duc­tion for ex­penses is dis­al­lowed if the tax de­duc­tion at source (TDS) has not been done in ac­cor­dance with the rel­e­vant pro­vi­sions. Whether an ex­pense is sub­ject to TDS or not is a mat­ter of in­ter­pre­ta­tion in many cases, with di­ver­gent views be­ing taken by the tax­payer and the tax depart­ment. Fi­nal­ity in such mat­ters is reached only at the higher ap­pel­late lev­els and af­ter con­sid­er­able time lag.

Mean­while, the tax­payer is de­nied de­duc­tion for gen­uine busi­ness ex­penses which have indis­putably been in­curred. More­over, it is per­ti­nent to note that the tax­payer is only per­form­ing this func­tion on be­half of, and for the ben­e­fit of the tax au­thor­i­ties. There is no direct or in­di­rect ben­e­fit to the tax­payer for ei­ther de­duct­ing or non-de­duct­ing the taxes. In fact, an oner­ous obli­ga­tion is cast on the tax­payer to carry out tax with­hold­ing.

An­cil­lary laws and the In­come-tax Act have spe­cific pro­vi­sions which levy in­ter­est, fine or penalty for var­i­ous kinds of non-com­pli­ance un­der the laws. Th­ese laws also con­tain strin­gent pro­vi­sions for pros­e­cu­tion. From the govern­ment's per­spec­tive, the in­ter­est and pe­nal pro­vi­sions un­der the laws en­sure com­pen­sa­tion for any de­lay or short­fall in de­posit of taxes, du­ties, prov­i­dent fund or other dues. The penalty and pros­e­cu­tion pro­vi­sions can be a vi­able de­ter­rent to en­sure that tax­pay­ers meet the com­pli­ances un­der var­i­ous laws.

Also, the de­vel­op­ment of e-com­pli­ance plat­forms and the tremen­dous ad­vance­ment in digi­ti­sa­tion fa­cil­i­tates swifter de­tec­tion of non-com­pli­ance and en­force­ment of pe­nal/pros­e­cu­tion pro­vi­sions un­der var­i­ous laws. Thus, there is a strong case for re­moval of con­se­quen­tial dis­al­lowance in the In­come-tax Act, as it casts a dual bur­den on the tax­payer and also results in un­nec­es­sary lit­i­ga­tion.

An­other set of pro­vi­sions that mer­its a sec­ond look is the frame­work for com­put­ing de­pre­ci­a­tion on as­sets. The In­come-tax Act recog­nises the writ­ten down value (WDV) method for de­pre­ci­at­ing as­sets. As­sets are grouped un­der sub-heads such as “tan­gi­ble as­sets” and “in­tan­gi­ble as­sets”, called “block of as­sets”. De­pre­ci­a­tion is charged on the block of as­sets rather than the in­di­vid­ual as­set and WDV needs to be worked out through­out the ex­is­tence of the block. In con­trast, un­der the Com­pa­nies Act 2013, de­pre­ci­a­tion is cal­cu­lated on in­di­vid­ual as­sets by con­sid­er­ing the use­ful life of the as­set, its cost and the resid­ual value.

This cre­ates a di­ver­gence in the quan­tum of de­pre­ci­a­tion claimed un­der the tax law and that com­puted in the books of ac­count for fi­nan­cial re­port­ing pur­poses, de­spite the fact that the as­set can (or should) de­pre­ci­ate only at one rate. Thus, the most ap­pro­pri­ate rate should be fol­lowed for the pur­pose of de­ter­min­ing book prof­its and for tax pur­poses as well.

There has been con­sid­er­able dis­pute and lit­i­ga­tion re­lated to de­pre­ci­a­tion un­der the tax laws. A sig­nif­i­cant pro­por­tion of such dis­putes could be ad­dressed by fol­low­ing a sin­gle set of prin­ci­ples for both tax and book de­pre­ci­a­tion pur­poses.

Sim­i­larly, pro­vi­sions un­der tax laws re­lated to Min­i­mum Al­ter­nate Tax (MAT) have also re­sulted in am­bi­gu­ity and lit­i­ga­tion. MAT was in­tro­duced to ad­dress cases where de­spite show­ing high prof­its in their books of ac­count and pay­ing sub­stan­tial div­i­dends, tax­pay­ers paid mar­ginal or no tax. The com­pu­ta­tion mech­a­nism re­quires var­i­ous ad­just­ments to ar­rive at the “book prof­its” on which MAT is cal­cu­lated. The DTC will pro­vide a good op­por­tu­nity to sim­plify the pro­vi­sions re­lated to MAT. The dis­tributable sur­plus as cer­ti­fied by the au­di­tors can be re­lied upon to levy MAT, in­stead of sub­ject­ing such book prof­its to fur­ther ad­just­ments.

The new Tax Code has opened a win­dow for the govern­ment to eval­u­ate th­ese pro­vi­sions and work to­wards keeping the tax laws sim­ple. The four prin­ci­ples or canons of tax­a­tion laid out by Adam Smith — the prin­ci­ples of equal­ity, cer­tainty, con­ve­nience and econ­omy — are still con­sid­ered as the cor­ner­stone of sound pub­lic fi­nance and the new Tax Code is just the right op­por­tu­nity for the govern­ment to make good its prom­ise of bring­ing in a tax­payer­friendly en­vi­ron­ment and im­prov­ing the ease of do­ing busi­ness in In­dia.

There have been dis­putes about de­pre­ci­a­tion and Min­i­mum Al­ter­nate Tax. A new Direct Tax Code will pro­vide an op­por­tu­nity to sim­plify the pro­vi­sions re­lat­ing to both

The writer is na­tional leader, tax - Grant Thorn­ton In­dia LLP. Ra­jashree Sarna con­trib­uted to this ar­ti­cle

A tax­payer fi­nalises his tax re­turn, aided by staff at the help desk of the In­come Tax Depart­ment. A task force is cur­rently draw­ing up rec­om­men­da­tions to align the tax regime with the needs of a fast-grow­ing econ­omy

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