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.