Trust, the new mantra in tax policy

The Centre’s commitment to reduce harassment of a sound taxpayer reaffirmed

This Budget has emphasised the idea of “trust” to enhance transparency and effective enforcement of tax administration high on its agenda. This is a step towards the invisible hand of trust that the Economic Survey 2019-20 referred to as a “public good that gets enhanced with greater use”. In her speech, the finance minister has aspired for a policy driven government, free from corruption, which is not only good in intent but trusting in faith. The finance minister has visualised the taxpayer and the taxman to mutually extend the hand of trust as the new mantra for wealth creation. Significant announcements have been made to bring radical fiscal measures in the f orm of reformatory steps i n quick succession, such that India Inc continues to tread high against global standards.

Over the years, the faith of the taxpayers in the government has receded due to the arbitrary and revenue biased assessments by the tax authorities. Introduction of the taxpayer ’s charter by way of a new provision in the statute, is an attempt to bring tax certainty for stabilisation of expectations of the taxpayer from the tax administration. The charter is intended to foster the government’s commitment towards zero tolerance with regard to harassment. However, it will be interesting to see as to how the charter would manifest keeping global experiences in mind. For instance, it is necessary that the charter should not have half-baked and unworkable nuances such as the establishment of an ombudsman, but instead have an empowered administrative panel which would interfere to save from a high-pitched assessment, manned by non-tax officials and accountable to Parliament, being some of the practices prevalent in the UK, Canada etc. Equally relevant is to have a statutory enforcement of such charter.

The finance minister reaffirmed the government’s commitment to reduce corruption and harassment of a bona fide taxpayer by extending the facility of e-assessment to e-appeals and e-penalties. While the nuances of the said scheme are not clear at this juncture, it appears that the first appeal of the taxpayer may be addressed by a system of faceless appeal, which will eliminate any need for a taxpayer ’s interface with the tax department during the adjudication process. While, this is a significant step to curtail unethical practice, however, it ignores the fact that complex interpretative provisions are difficult to explain in a written form. This aspect requires advertence in designing the ground rules for a faceless appeal. Since the procedure is agnostic to jurisdiction, it shall certainly help reallocate the work of commissioner appeals. The finance minister announced multiple steps to minimise the compliance costs to businesses and individual taxpayers. It is proposed that returns under income tax and goods and services tax (GST) may be simplified and in certain cases may be auto filled and generated. It shall help address small and medium business enterprises’ cry for reducing the compliance burden. Further, to reduce compliance burden, the threshold limit for tax audits has been proposed to be increased from ~1 crore to ~5 crore, provided not more than 5 per cent of business represents cash transactions. This will materially reduce the compliance burden on small and medium enterprises (MSMES). To address tax evasion, the finance minister also envisaged a system of cash reward to incentivise customers to seek invoice, thereby increasing tax compliance.

Further, the Budget carries several rationalisation measures. To target evasion or avoidance of tax by bringing in measures such as imposing eligibility of the donor/payee to claim deductions only upon furnishing a statement and certificate which are to be mandatorily issued by trusts towards donations received. Further, the Finance Bill has also incorporated provisions to cutshort attempts deployed by high networth individuals (HNIS) with economic interest in India for tax avoidance on the income, through modification of residency provisions. The Bill has proposed to reduce the number of visiting days from existing 182 days to 120 and has also i ntroduced deeming provisions whereby an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India. This is in line with the OECD’S efforts to combat stateless income.

Further, taking a leaf from the success of last year ’s dispute settlement scheme, the finance minister has introduced a similar scheme under income tax for settlement of tax disputes. Under this scheme a taxpayer will be required to pay the entire amount of disputed tax and in return will get a complete waiver of interest and penalty, provided he deposits the dues before March 31, 2020, which can be extended to June 30, 2020, with a small disincentive. No doubt such steps will increase the efficiency in tax administration by substantially reducing tax litigation. However, such settlement schemes, may discourage honest and tax compliant taxpayers. Instead of such one-time measures, the finance minister could have considered revisiting and overhauling the penal provisions, which has led various taxpayers on the warpath with the government.

Overall, the Budget appears as an earnest attempt to win the trust of the investors, businesses and common taxpayers alike. However, there would be a constant need for continuous and sustained efforts towards instilling the real trust of businesses and individual taxpayers in the tax department. This can be done through consultative participation by obtaining constant feedbacks from the taxpayers. It is also necessary that such reforms are effected as a matter of routine and not as a one-time measure. It would be seen whether this trust would turn out to be t he key to “economic freedom and wealth creation”. A comprehensive assessment and a sustained effort are required to ease business regulations, providing an environment for businesses to flourish would be a key structural reform that would enable India to grow at a sustained rate. ceeds of the cess shall be used for creating infrastructure for health services in the aspirational districts. This is the most cumbrous way of collecting duty. The duty itself could have been increased. Once a cess is brought in, it will ultimately become a cesspool.

While exemptions can be withdrawn at any time of the year, the rates of duty cannot be changed except during the Budget. Let us have a look at the rates of duty of customs. They are 5, 7.5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 60, 70, 75, 100, 105, 150 and a large number of fixed rates of duty. The finance minister may also like to consolidate these rates of duty into a few rates. There is also a plethora of lists and conditions attached to the exemptions. In the same chapters, there are several rates of duty. If the finance minister has a look at the customs tariff she will be convinced that a major reform in the form of simplifications is necessary. Maybe the National Institute of Public Finance and Policy can be requested to work out the reform, working along with the Budget Section of the finance ministry. The institute has given many good suggestions in the past.