Justice Mr. R.K. Agrawal of the Supreme Court grapples with the several problems plaguing the Indian judicial system especially in the field of taxation. He has offered practical suggestions on how some of these problems such as those relating to pendency can be resolved. He has also highlighted the role that tax professionals should play to ensure that the reforms are speedily ushered in. The learned Judge emphasizes that legal professionals owe responsibility to the taxpayers’ community and are duty-bound to extend a helping hand for reduction of litigation and checking its mushrooming tendency
Taxes are the Governments’ way of earning an income which can then be used for various projects that the Governments need to indulge in to help boost the economy of the country or its people. Taxation is important to society because government use the tax revenues to fund projects related to health care systems, education systems, public transports etc. Also, the money collected can also be used to give employment benefits, pensions and other matters that can benefit the society as a whole. Without tax, the Government would not be able to fund the essential projects and services that people need.
Tax laws consist of a body of rules of public law that affects the activities and reciprocal interests of a political community and the members composing it as distinguished from relationships between individuals in the sphere of private law. It can be divided into substantial tax law, which is a body of the legal provisions giving rise to the charging of a tax; and procedural tax law, which consists of the rules laid down in the law as to assessment and enforcement procedure, coercive measures, administrative and judicial appeals and other similar matters.
The subject, important enough, at any time, is of particular significance now, since Indian economy, being plan-conscious and plan-directed, is in a transitionary stage, when efforts are being channelled towards the rapid economic development of the country.
Tax reform is one of the pressing Issues currently engaging the attention of the Public and the Government. Tax is not only a prolific revenue-yielder but exerts a major impact on the economic and social life of the people.
“Oliver Wendell Holmes once said: ‘I like to pay taxes. With them I buy civilisation.’”
Assuming a certain level of revenue that needs to be raised, which depends on the broader economic and fiscal policies of the country concerned, there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems. ‘Fhese include neutrality, efficiency, certainty and simplicity, effectiveness and fairness, as well as flexibility. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sectors. The revenue is allocated on various productive’ sectors in the country with a view to increase the overall growth of the country. Tax revenues may be used to encourage development activities in the less developed areas of the country where normal investors are not willing to invest.
In a context, where many governments have to cope with less revenue, increasing expenditures and resulting fiscal constraints, raising revenue remains the most important function of taxes, which serve as the primary means for financing public goods such as maintenance of law and order and public infrastructure.
As Stated by Holly Sklar
“Taxes are how we pool our money for public health and safety, infrastructure, research and services – from the development of vaccines and the internet to public schools and universities, transportation, courts, police, parks and safe drinking water.”
Taxation follows the principle of equity. The direct taxes are progressive in nature. Also certain indirect taxes, such as taxes on luxury goods are also progressive in nature. This means the such class has to bear the higher incidence of taxes, whereas, the lower income group is exempted from tax (direct taxes). Thus, taxation helps to reduce inequalities of income and wealth.
In modern times, the aim of public finance is not merely to raise sufficient financial resources for meeting administrative expense, for maintenance of law and order and to protect the country from foreign aggression. Now, the main object is to ensure the social welfare. The increase in the collection of tax increases the Government revenue. It is safer for the Government to avoid borrowings by increasing tax revenue. Taxation generates social welfare.
A part of the tax revenue is utilised for social development activities, such as health, family welfare etc., which also improve social welfare as well as social order in the society.
The taxes that we pay are what enable the lesser privileged many to get a good education and healthcare that they cannot afford themselves. In fact, the Government is able to work out plans of free primary education or free high school and college education for the under privileged only because of the income that it gains from taxpayers.
An important merit of taxation is that it is not only a good instrument of resource mobilisation for development but it also cuts down consumption of goods and thereby helps in checking inflation. Whereas direct taxes on income, profits and wealth reduce the disposable incomes of the people and thereby tend to reduce aggregate demand in the economy, indirect taxes directly discourages the consumption of the goods on which they are levied by raising their prices.
Taxation policy should be used to prevent the potential economic surplus from being wasted inconspicuous consumption and unproductive investment. It may be noted that this potential economic surplus is not a given amount but it increases in the very process of economic development.
It is worth mentioning that in a mixed economy such as ours, there is a need to raise not only the public savings and investment but also to promote private savings and investment so that the overall rate of saving and investment in the economy is stepped up. This implies that taxation measures should not impair incentives to save and invest of the people. Therefore, a developing economy encounters a crucial dilemma in augmenting larger resources for public investment on the one hand and to promote private savings and investment on the other.
Role of professionals
The tax profession is a solemn and serious occupation. It is a noble calling and all those who belong to it are its honourable members. Although the entry to the profession can be made merely by acquiring the qualification of tax competence, the honour as a professional has to be maintained by its members by their exemplary conduct both in and outside the Court.
Practice in the field of taxation is considered as a traditional field where members of the legal and accounting profession have made a very useful contribution. Lawyers and charted accountants, with their expertise in the field of law and accounting, have a distinct advantage in tax practice.
Some of the professionals who hold dual qualifications as an advocate and as a Chartered Accountant and who are engaged in the tax practice find their accounting background to be very useful in resolving many complicated legal issues in day-to-day practice. Apart from direct taxation, many professionals have now specialised in the filed of indirect taxation such as sales tax, excise duty, custom duty etc.
What is necessary is to create a public Image that the members of the profession are competent, that they are keeping public interest above self interest, that the members are honest and that the erring members are awarded due punishment expeditiously. This is possible only if each member supports the effort of the professional body. Legislative support may not be available for all efforts. This has to be supplemented by self regulatory measures. It is in the field of self regulatory measures that support of the members is more needed for enhancing the public image of the profession.
Pendency of tax matters before courts and methods for reduction of litigation
It is common knowledge that hundreds of thousands of cases by way of Second Appeals before Tribunal, writ petitions, applications and references before the High Courts and Special Leave Petitions before the Supreme Court relating to taxes, are pending for disposal. The pendency is increasing day-by-day because the disposal during. any period always lags behind the additions during such period. It is also noticed that while the ratio of cases as filed by the assessee and the department before tribunal is nearly equal, the same IS greatly disproportionate in the case of the matters pending before the High courts and the Supreme Court.
This attitudinal background has to be kept in mind to resolve the problems of pendency.
• As a first step, it will be necessary to drastically curtail indiscriminate filing of the applications and references by the department since the pendency on account of such applications and references constitute more than 90% of the total pendency before Courts.
• Much of litigations arise because of myriad exemption and deductions. If these are given a go-by and instead very low rates of taxes in direct taxation statutes introduced, there may hardly arise any controversy between the revenue and taxpayers.
• Lastly, legal professionals also owe responsibility to the taxpayers’ community and therefore must extend helping hand for the reduction of litigation and checking its mushrooming tendency.
Moreover, in matters of taxation, like in the administration of the law, it is not enough that justice should be done–it must also be seen to be done. If owing to defects in the tax law or in their administration, highly progressive taxes on wealth or income have no visible effect on the prevailing economic inequalities or in the standards of living of the rich, the mere enactment of advanced tax legislation will prove fruitless.
In a way, there must be equity in a taxation system and an element of redistribution of resources between high and low income people as well as similar tax burden for taxpayers with similar means. Taxation must impact neutrally on various taxpayer groups and economic sectors, and commercial decision making must not get distorted by the tax considerations. Simultaneously, the system should have nexus between the revenue proposed to be raised and the public expenditure needs. A good tax system must always pave the way for simplicity and transparency in the system. Taxpayers must be able to clearly understand the nature and extent of their obligation and consequences of non-compliance and they must also know how and when they are paying tax. Similarly, the tax scheme should be so framed that there would be minimal incentive and potential for avoidance of taxation.
So, I would like to say that we all should strive together to achieve the main object of tax laws and Constitution which could help in the development of nation in a better way. I conclude with an earnest hope that members of this Association will rise to the occasion and meet the challenges of new millennium with dynamism and enthusiasm.
I wish the Association every Success.
[Source: Speech delivered at AIFTP’s Two Day National Tax Conference held at Jamshedpur on 20th August, 2016. Reproduced with permission from the AIFTP Journal]