Complex Tax Laws & Hostile Tax Dept Are Responsible For Tax Avoidance
Justice Swatanter Kumar (Retd)
Justice Swatanter Kumar, who was party to the landmark judgement of the Supreme Court in Vodafone International vs. UOI 341 ITR 1, bluntly says that the primary reason for tax avoidance in India is the complexity in its tax laws and the unfriendly nature of its administration. He urges the Government to focus on simplification of the law and improvement of the tax administration and offers suggestions on how this can be done
"Taxation is the price which civilized communities pay for the opportunity of remaining civilised."
— Albert Bushnell Hart, Actual Government, 1903
Tax patently appears to be an individual liability. Examined objectively, it is an investment for development and for the good of the society. I am very happy that the All India Federation of Tax Practitioners has chosen me to engage in a deep and mutually enriching dialogue with Indian Tax Professionals. I assure you that your interest in Indian taxation jurisprudence will provide you with a unique and stimulating journey, through the realms of abstract philosophy and also right up to the challenging ground realities of developmental concerns.
There seems to be universal agreement that the present tax code is way too complex and needs to be completely overhauled. Complexity in itself creates opportunities for tax avoidance and also causes difficulties for honest tax-payers. It leads to confusion and mistakes that are often hard to distinguish from dishonesty. Consequently, penalties become a less appealing approach to enforcement, while simultaneously, detection becomes costlier
India has a well-developed tax structure with clearly demarcated authority between the Central and State Government as well as the local bodies. Taxation policies have always been driven by the love of extremes: the taxation of private wealth is often termed as expropriation; the accumulation of wealth can – and does – drive insurmountable and unacceptable rifts between the haves and the have nots. Thus, the Father of this nation, Mahatma Gandhi, diplomatically proposed a third alternative, one he claimed that has the sanction of religion and philosophy behind it; independent India was to seek the protection of trusteeship, wherein individual wealth was protected to the extent that it confers a right to a livelihood – and the remainder was held "in trust" for the public good, preventing the accumulation of private legacies.
This philosophy has, obviously, been a forerunner of its times. Modern international taxation practice, in a surprising parallel, also views taxation as a means for directing and regulating the flow of investment. That is, in Gandhiji’s words.
"We can try to canalise economic trends, but we can’t run against them in a head-on collision."
Another significant aspect that cannot go unnoticed is globalisation. Globalisation and taxation, today, are synonymous; they are but two sides of the same coin. Finally, we have reached a time when Indian taxation jurisprudence recognises the worth of this philosophy and is coming to stand on its own feet. Driven in the wake of the recent, epoch-making, Vodafone decision of the Hon’ble Supreme Court of India, we now enter an age where the manner and scope of taxation is a factor which makes or breaks the foreign investment in any given country. In the words of the past Secretary-General of the united Nations, Mr. Kofi Annan:
"It has been said that arguing against globalisation is like arguing against the laws of gravity."
Global and comparative dialogue, through conferences such as this one and at turning points such as this, is critically important for all concerned. A country which is as yet developing, both in its global economic confidence and in its taxation regime, needs the encouragement and support of its contemporaries. Conversely, it has considerable potential to contribute uniquely to and better the system as a whole.
Personally I believe that India faces a range of internal challenges which require her to synthesise, for herself, a new blueprint of taxation; a format which would reach a compromise between the largesse of the State and any unhealthy concentration of wealth or resources in private hands.
India, in Mark Twain’s words, is not only the cradle of the human civilisation, but also the land of the fabulously rich and the fabulously poor – the land of palaces and hovels.
The biggest problem today is not only that the law is complex, but that it is administered in a complex and unfriendly manner. Focus must therefore change from simplification of tax laws to improving tax administration. Lessons can also be learnt from international best practices
Our economic challenges are statistically significant. The Organization for Economic Co-operation and Development (OECD) itself recognizes that a widening gap between the rich and the poor is a result of the limitations faced by taxationn systems around the world, in controlling and regulating the flow of redistribution monies (i.e., tax proceeds) among informal and unregulated economic labour. Naturally, this challenge is particularly exacerbated in India, where economic activity is dominated by the informal sector. How, therefore, may we best lejerage our potential in a globalised world, attractively package our best investment opportunities, while nevertheless serving as the vanguard of the poorest of the poor? These questions plague our tax authorities every day, in every case.
Simplification of Tax Laws
The often quoted statement is: "equity and taxes are strangers’; one could add that ‘tax laws and simplicity are also strangers’. In the Wealth of Nations, Adam Smith famously noted that complexity makes taxes "more burdensome to the people than they are beneficial to the sovereign". The cost of taxes is not just the taxes we pay, but also the cost of complexity, popularly now termed as ‘compliance cost’.
There seems to be universal agreement that the present tax code is way too complex and needs to be completely overhauled. Complexity in itself creates opportunities for tax avoidance and also causes difficulties for honest tax-payers. It leads to confusion and mistakes that are often hard to distinguish from dishonesty. Consequently, penalties become a less appealing approach to enforcement, while simultaneously, detection becomes costlier.
In other words, complexity not only increases the cost of compliance for the tax-payer, but it also increases the cost of enforcement for the Government. Therefore, before giving in to demands of special interest groups, one must think hard about whether the alleged equity or advantage resulting from each new exception (exemption, deduction, etc.) is really worth the added complexity and confusion.
Law, despite its source, is essentially mutable and has to change with the changing needs of the society to ensure that the legislative intent is achieved. Simplification of the tax laws, thus, would be a welcome step. As far as possible, they should be simplified so that it is not subject to different interpretation by different parties. Simplification of indirect tax collection laws will help in resolving disputes. There has to be a dispute settlement mechanism within the department so that tax collection is made simpler and there is a less pressure on tax collection machinery and suggested the authorities to devise ways to facilitate smooth tax collection.
The biggest problem today is not only that the law is complex, but that it is administered in a complex and unfriendly manner. Focus must therefore change from simplification of tax laws to improving tax administration. Lessons can also be learnt from international best practices. For example, OECD and the United Nations have been incessantly working for reducing complexities in international taxation by drafting model treaties for avoiding double taxation.
I hope this National Conferences shall provide clarify and understanding to the complex laws relating to direct and indirect taxes. Such seminars, deliberations and interactions project solutions to complex problems. And as it is truly said that strength lies in differences and not in similarities.
Right approach. True simplify tax as any complexity confuses.
Thanks
ShrutiCorp
problems are public officers deliberately misread to some how collect tax irrationally pains in India that is for some ulterior purposes, that need to be corned, yes you can if you press into service of sec 166 of IPC, how many knows the sec 166 and how many know the art of using especially among ordinary tax payers who are the most harassed like in customs dept where all rich companies and majors are comfortable but how many small companies are harassed as also in central excise as also in sales taxes.
so the sufferings are umpteen for small persons, like middle class which only pays lions share of taxes while rich pays least in direct or indirect taxes. so there is no parity at all!
@sanjeev josh
On most of the things forcefully put across, wprt the extremely complicated US Tax Code, which any day can only a poor comparison with the extant code of India, may be, many belonging to the taxpaying community may agree to agree.
Likewise, on the ‘truth nothing but the truth’ underlying the quote in the penultimate para, with opening words, – “In my research”).
If at all one were to add:
1.The truth is something pervading the whole universe; not simply the US. Except, of course, by any standard or yardstick, the US (once regarded a super power) happens to be, inferably, nay naturally, blessed with an overwhelmingly large number of ‘super brains’; dwarfing comparison with counterparts in any other country. Further, for knowing that is the truth not simply confined to or obtaining in the realm of administration of ‘tax code’, the analytical study posted in, among others, vide the 2 Blogs @ M&A Law Prof Blog; and – Deal Professor AND
2.The tragedy standing out/stasring in the face is that, our men in governance have, in recent times and increasingly so, chosen the US as THE role model, and toe the line with, in every sphere of activity / fiscal or others. Worth a mention is some of the enactments of a recent origin- specimen, Transfer Pricing, – despite it being/having proven to be one of the complicated / convoluted piece of legislation
My Dear Learned Friends,
Reading Hon’ble Justice Swatanter Kumar’s thougts I did some research on the position of complexity of Tax Laws in the United States of America. I wanted to see if we were justified to accept that in India “Complex Tax Laws & Hostile Tax Dept Are Responsible For Tax Avoidance”. Here-in-below are some quotes and facts collated from various sources:
U.S. Representative Jo Ann Emerson (R-MO) :
“The Bible, the guide of our lives, is 1,291 pages and contains 774,746 words. But the Tax Code and its regulations which are referred to by some as, ‘a person’s worst nightmare come true’ is 9,471 pages and over 7 million words.”
…and President George W. Bush (courtesy of Professor Paul Caron of the TaxProf Blog):
“The tax code is a complicated mess. You realize, it’s a million pages long.”
“Of course the truth is that the congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there. I bet that if you actually read the entire vastness of the U.S. Tax Code, you’d find at least one sex scene (“‘Yes, yes, YES!’ moaned Vanessa as Lance, his taut body moist with moisture, again and again depreciated her adjusted gross rate of annualized fiscal debenture”).” ~Dave Barry
By the way, if you go to the US Government Printing Office ( http://www.gpo.gov ), you can order a complete set of Title 26 of the US Code of Federal Regulations (that’s the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.
According to the US Government Printing Office, it’s 13,458 pages in total. The full text of Title 26 of the United States Code (the part written by Congress–available for an additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845. The number of words has been left as an exercise for the student.
Since 2001, there have been about 4,680 changes, or an average of more than one change a day. What else troubles Olson (and most of us)? Here’s what:
● Nearly 60 percent of taxpayers hire paid preparers, and another 30 percent rely on commercial software to prepare their returns.
● Many taxpayers don’t really know how their taxes are computed and what rate of tax they pay.
● The complex code makes tax fraud harder to detect.
● Because the code is so complicated, it creates an impression that many taxpayers are not paying their fair share. This reduces trust in the system and perhaps leads some people to cheat. Who wants to be the sucker in this game? So someone might not declare all of his income, rationalizing that millionaires get to use the convoluted code to greatly reduce their tax liability.
● In fiscal year 2012, the IRS received around 125 million calls. But the agency answered only about two out of three calls from people trying to reach a live person, and those taxpayers had to wait, on average, about 17 minutes to get through.
·In particular, Olson points out that it takes US taxpayers (both individuals and businesses) more than 6.1 billion hours to complete tax filings; it was estimated that it cost individual and corporate taxpayers US$ 168 billion to comply with the tax code in 2010; and around nine out of ten Americans rely on paid professionals or commercial software to prepare their tax returns (nearly 60% of taxpayers hire paid preparers; another 30% use software).
Most interestingly, Douglas Shulman says he uses a hired tax preparer because the U.S. tax code is so complex. That’s a bad sign. He’s the I.R.S. commissioner ie he is the Chairman in the USA!
Even if someone could read all of the US Tax Code, the rules would be obsolete by the time he finished. There have been more than 4,400 changes to the tax code over the past decade, or more than one a day.
Can the tax system become too complicated to be constitutional? Consider the following two sentences from different sources:
1. “[A] statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates the first essential of due process of law.”
2. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
The first sentence comes from a 1926 US Supreme Court decision that helped establish the right of citizens to known what laws mean. The second comes from the US tax code.
Taxes are voluntary, you say? Good luck. United States v. Tedder in 1986 made clear that while the general method of collection is voluntary, it can be made involuntary in a hurry if you don’t volunteer your bit.
Compliance to tax law, you claim, is a form of slavery and thus violates the 13th Amendment? I admire your creativity. But the U.S. Court of Appeals didn’t admire it as much in its 1956 ruling on Porth v. Brodrick.
This is not a nation of law or finance scholars. US Department of Education studies have shown that nearly two-thirds of respondents struggle to make sense of a bus schedule, and more than half can’t add two items on a lunch menu and calculate a 10% tip. If the average person can’t fully read or understand the rules, the rules no longer seem fair. Why don’t the courts force tax simplification?
“You’d never get that argument in front of a judge,” says Daniel Pilla, a tax litigation consultant and the author of 11 books, including “The IRS Problem Solver.”
Procedurally, Pilla says, the effort would go something like this (and he strongly recommends against anyone going down this path). A citizen would pay their tax as usual and then file for a refund. In the claim he’d state his case that the complexity of the code is a violation of due process of law as protected by the 5th Amendment.
At that point, the IRS would almost surely fine the filer $5,000 for trying, says Pilla. (Its list of frivolous claims specifically refutes the argument that taxes constitute a taking of property without due process, although it says nothing about the complexity argument. After the IRS turns down the claim, the filer could sue in federal court, at which point, says Pilla, the case would surely get “bounced.” That is, the U.S. government would file a motion for summary judgment saying the issue is settled by existing case law.
In my research, the best quote I found was : “Our tax code is just a continuing full employment act for accountants and lawyers.” – Dane Stangler, Director of the Research & Policy department at the Ewing Marion Kaufmann Foundation. Wow! I love the idea! It so cute and full of promise for our new CAs.
Can less complexity guide us to a simpler, better life ahead? Is the Indian Tax landscape more complex than the US? Do we deserve more sympathy? I’d love to hear your thoughts.
Got to run, bye!
With warm best wishes and regards,
Sanjeev Josh LL.B, DMB, FCA, Mtax, IRS
Just thinking aloud:
Very simply read, may be, the viewpoints canvassed are, by and large, commendable as ‘right approach’. May also hoped to help out, even if it be in a limited way, the income-tax taxpayers having a good case but who cannot afford to quarrel with the Revenue and keep pursuing it to the end of success or otherwise.
Except that, from a pragmatic consideration, they seem to be fraught with impediments; to mention a couple of imponderables or insurmountable:
1. The suggestion of two sets of tax laws sounds an oversimplification; in that, the premise that taxpayers are amenable to being grouped only under two mentioned categories does not seem right.
2. Any one of the direct or indirect tax laws is not, in the very nature of things, capable of being administered independently or on a standalone basis; that is, having no regard to any other law intertwined or interrelated in some way or the other. To put it differently, simplification of any law without simplifying any other related or connected law might not serve the avowed purpose. For example, income-tax or service tax law has a close correlation with property law.
It all looks a vicious circle; any viable comment?
Right approach. True simplify tax as any complexity confuses every tax payer. Confusions create several misses in correctly paying taxes. Besides, definitely wealthy need be taxed and poor over taxing by direct and indirect taxes cause several problems and even every player in indirect taxes tend to cheat and worst offended is poor consumer. Rich man works on tax management where is such study possible with middle class as their tax consultants what they say is just accepted but unfortunately tax consultant several times is lackadaisical in helping middle class properly and invariably lands poor middle class. One has to see where the show pinches why do you blame tax payer is the principle. Poor in number is very great and so too middle class and they cannot pay consultancy that heavily, so government perforce need to make straight tax methods instead of cumbersome methods that is very much needed i8n democratic society where poor people and middle class mandate is primary for any government to be formed and so bound and duty of government make things easy for poor and middle class. If the need be make two sets of tax laws one for rich/wealthy and another for poor and middle class so that tax administration is not complex.
Placing emphasis for tax administrator and less on people is like putting cart before the horse!