The author puts on his thinking cap and conjures up a 10-point wish-list of conceptual changes that need to brought about in the tax policy to ensure effective compliance. He also uses his vast experience in the field of tax laws to identify specific loop holes and suggests measures to plug the same.
Every year the Hon’ble Finance Minister interacts with representatives of industries. Representative of each industry appeals to the Hon’ble Finance Minister to give concession in rate of tax and incentive to their industry. However, we are not aware of any representation from any industry to raise the tax base, simplify the tax law and humanise the tax administration. My experience shows that it is the tax professionals, who make the representation objectively without any favour or fear. Earlier the Member Legislation of Central Board of Direct Taxes used to visit Mumbai before the Finance Bill and after introduction of Finance Bill and discuss with the professional organisations to ascertain their views on various issues and provisions. We hope this tradition of interacting with voluntary organisations will be resumed to common good. One of the duties of the tax professionals is to make representation for better tax law and responsive administration. The suggestions herein, therefore, are made in three parts and deal with the issues that engage us viz.
(A) Conceptual (B) Specific and (C) Increase of Tax Base.
1. Bring Accountability in Tax Administration
Some of the officers make additions, in full knowledge that the additions will be deleted. Similarly, some of the First Appellate Authorities confirm the additions knowing full well that the additions will not be confirmed. Statistics show that 85% of the additions made by the assessing officers are deleted by the Tribunal, which is the final fact finding authority. This type of unproductive work can be reduced to the minimum, if the concept of accountability is incorporated in the tax administration following recommendation made by Tax Reform Committee (Dr. Raja J. Chelliah) (1992) 197 ITR 257 (St).
2. Major Amendments in Tax Laws should be made only once in five Years
The Finance Bill of each year should lay down the rates of tax and urgent clarifications or simplification. But major amendments should be made only once in five years. This will make for stability in tax laws.
3. Independent Committee to suggest amendments in Tax Laws
An independent Committee consisting of representatives from profession, tax administration, taxpayers, judiciary, etc. ongoing basis may scrutinise suggestions received from various bodies. After examining in detail, they should suggest amendments which should be made public and debated. Only thereafter the amendments be introduced. If this process is followed we are sure 90% of litigation will be reduced automatically.
4. Tax evaders and corrupt officials must be ostracised and denied association with public functions of Government and Professionals
Department conducts survey, search and seizure action against the alleged tax evaders. After a few days one finds the alleged tax evader sharing the dais with ministers and top Government officials. It is the duty of the ministers and Government officials to ensure before sharing the dais with the persons to verify at least whether any search action has been conducted against him by any of the revenue authorities. If yes what is the result. Similarly, we find when an action is taken against a corrupt official the paper post reporting of action against a corrupt official. The media should be informed about the progress at regular intervals by the investigating agency. CBDT should publish such information at least once in a year and feed the information to various professional organizations for publication in the journal.
5. Concept of promissory estoppel
We are aware that the principle of promissory estoppel is not applicable to Government. However, considering political scenario, development of economy and inflow of investment to India, at least in fiscal laws, the concept of promissory estoppel should be introduced, which will bring stability in tax laws. No amendment may be introduced retrospectively which affects the tax-payer’s rights.
6. Arbitration in tax matters (lok adalat)
The Government may consider the proposal of constituting a committee consisting of representatives from legal and accountancy profession and from the tax department of the rank of Chief Commissioner of Income-tax for arbitration in tax matters. The assessee may refer the matter to such committee within 30 days of receipt of the order from the assessing officer and the committee should pass an order within six months from the receipt of application. The order passed by such committee may be made binding on both the parties. To begin with the matters like technical defaults, refunds, etc. may be referred for resolution. The concept of Lok Adalat may be introduced. The Government may consider the services of retired members of Tribunal The proposal will benefit the tax payers as well as the tax department.
7. Advance Ruling for taxation – scope may be extended to Residents by giving power to Income Tax Appellate Tribunal
One of the very important provision in the Maharashtra VAT legislation is the provision for Advance Rulings on the interpretation of any provision of the Act, Rules or Notification in respect of a transaction proposed to be entered into by any registered dealer even though any such question relating to the said provision has not arisen in any proceedings. The Advance Ruling is given by the Bench consisting of three members of the Sales Tax Tribunal, senior Practitioner nominated by the President of the Tribunal and an officer of Sales Tax Department not below the rank of Jt. Commissioner nominated by the Commissioner of Sales Tax.
If similar provision is introduced in the Income tax Act, Central Excise, Customs & Service Tax, for all residents, litigation can be substantial reduced and tax payers will know the tax liability. I am of the view that the Income tax Appellate Tribunal is more competent to decide the issues relating to Advance Rulings. It is therefore, suggested that in respect of residents the power of authority for advance rulings may be given to the Income tax Appellate Tribunal.
8. Transparency in legislation
We observe that there is no concept of transparency in legislation. Before passing the legislation the Government may send the draft legislation to the various bar associations for their views. Once view is received the draft legislation can be introduced in the form of Bill. However, it is found the Government first introduces the bill and when criticism is received tries to amend the law.
9. Independent Legal Department of tax administration
City of Mumbai contributes 40% of Direct Tax Revenue. However, it is very unfortunate that “major” tax litigant i.e. Income-tax Department before the High Court of Bombay does not have its own legal department. Each state should have a separate legal cell in the Tax Department. The legal cell may be managed by the panel of lawyers in co-ordination with the Chief Commissioner Judicial. Before filing an appeal the legal Cell should consider the tax involved, issues involved and chances of success. Only after panel of legal department is satisfied the appeal may be directed to be filed. As soon as the appeal is filed the legal department should be able to find out the issues involved and the tax effect. If it is a very important issue affecting large number of matters the legal department should make a request to group all the matters together. If it is of national importance the legal department may request the court to take up the matter for an early hearing. At Board level there has to be central legal Cell to monitor the tax appeals pending before various High Courts and Apex Court. Legal Cell of each state should send the list of cases filed before the High Court and the issues involved and matters heard and disposed off. Once in a year the Board should prepare the list of cases pending before the various High Courts, Apex Court and publish the same for the information of tax payers.
10. Research team to monitor the tax matters before various High Courts
The City like Mumbai should have a well equipped library to assist the counsel who represents the matters before the Court. The Department may take assistance of young lawyers or law students by paying honorarium to assist the counsel. They have to prepare the note on issues involved, cases for and against.
This may make for better representation before the Court. This may help the tax department to build the team of panel of lawyers for the Tax Department.
(B) Specific amendments
There are number of issues which require specific amendments. I am of the view following specific sections require immediate attention.
1. Housing project – Notification of 80-IB(10)
In the City of Mumbai there are innumerable slum rehabilitation projects which are carried out by various undertakings engaged in development of housing projects. These projects are approved by the Government of Maharashtra as slum Rehabilitation Project (SRA Project). Through the Finance Act (No. 2) 2004, the legislature has removed the restrictions of the project size by a proviso due to difficulties faced to develop the project on an area of one acre within the slum, but such slum has to be notified by the Board. It is very unfortunate that the Board has not notified a single project. Even “Dharavi” which is the biggest slum of Asia, has been not notified. The Board may be directed to notify at least Dharavi in Mumbai for eligibility of claim under section 80-IB (10) though the size of the plot may be less than one acre.
2. Disallowances of expenses for failure to Deduct Tax at Source – S. 40(a)(IA)
By deducting the tax and depositing the tax into the treasury of Government the assessee is working for the Government. There may be number of genuine difficulties due to which the assessee may not be in a position to make the payment on due date. In such a situation disallowing the entire expenses may not be justified. For delay in depositing the tax, the assessee may be made liable to interest. There may be situation where there may be loss in the business in next year and the deduction claimed is artificially disallowed one year the assessee may not have any money to pay the tax. This artificial disallowance will make the assessee bankrupt. The provision may be deleted or alternatively if the tax deducted is paid before filing the return the deduction may be allowed.
3. All orders to be made appealable
At present section 246A provides lists of specific orders that are appealable. This creates plethora of litigation only on the issue whether a particular order is appealable or not. Making all orders appealable would simplify the law and generate confidence in the tax payers that they have a legal recourse available to challenge any order.
4. Appeal to Tribunal
At present the assessee can appeal against the order under section 263 and refusal of registration under section 12A of the Income Tax Act by the Commissioner of Income Tax. There are number of other orders passed by the Commissioner for which no appeal is provided. The only remedy available with the assessee is to approach the High Court in its writ jurisdiction, which is very costly and time consuming. A simple amendment in the Income Tax Act may be made by stating that all orders of Commissioner of Income Tax are made appealable to Tribunal. Some of the orders which can be considered are:-
(a) Order under section 264 (b) Order under section 273A (c) Not staying the recovery of tax when appeal is pending before first Appellate Authority. (d) Issue of notice under section 148. (e) Order under section 179.
Lot of litigation arises on account of reopening of assessment. All orders of jurisdiction challenging the reopening may be made appealable to the Tribunal, which will save substantial time of the High Court. To decide the issues relating to above matters, the facts have to be looked in to. The Income Tax Appellate Tribunal being final fact finding authority under the direct taxes is eminently qualified to first determine the issues of fact and thereafter the aggrieved party may file an appeal before the High Court on question of law.
5. Deemed speculation – S. 73
Section 73 of the Income-tax Act deals with deemed speculation. If any company deriving business income incurs losses on purchase and sale of shares the resultant loss would be a speculative loss. Next year the company may have profit in share dealing when there is profit the income will be assessable as business income. Speculation loss can be set off only against speculation profit; this leaves an unbalanced situation for companies whose main objective is to deal in shares. These companies may have to pay the taxes year after year simply because carried forward losses are deemed speculation. It is suggested that the explanation of section for deemed speculation may be deleted or may be modified to exclude companies primarily incorporated or otherwise dealing in shares and stocks of those companies that are members of stock exchange.
(C) Raise the tax base
1. Taxation of Agricultural Income
Federation had made a representation to the Kelkar Committee to tax the agricultural income from cash crops above certain reasonable limit. Due to constitutional prohibition if it is not possible to levy tax on agricultural income, in the return specific details may be furnished of agricultural income or holding of agricultural land. All the cases where the assessee having agricultural income of Rs 5 lakhs and above may be asked to file returns which will enable the department to find out whether the income shown is agricultural or income from any undisclosed source. The non cash crop production in our country is reducing year after year in view of the land which was used for paddy cultivation is now being used for cultivation of rubber, coffee, cashew, sugar cane, etc. This is a dangerous situation for the country. We may have to import food grains soon. It is therefore very essential to bring legislation wherein the production of basic necessities of life like paddy, wheat, vegetable, etc., may be fully exempt from direct taxes and cash crops may be made taxable after certain limits.
2. Encouragement to make payment by cards
In the city like Mumbai, if you are paying by cash some of the shop keepers allow discount, however, if one pays by card there will not be any discount. To encourage the payment through banking channels and by use of cards, it is suggested that the tax department should not ask the assessee to produce the party for verification. Where as if the payment is received by cash the burden of producing the purchaser is with the assessee. I am of the opinion that this will encourage to bring more assessees under tax net.
3. Culture of tax service
Approach of tax officials must be changed from tax collector to tax service. If tax officials change their attitude towards assessees and guide them and advise them to pay the taxes without bothering about technicalities I am of the opinion that many assessees may come forward and pay the taxes regularly. Chief Commissioner should call the assessees who are filing the returns regularly and paying the taxes to discuss the difficulties, if any, faced by them and try to solve the difficulties. If culture of tax service is introduced, the tax payer will react very positively and pay the taxes voluntarily without any motive to evade the tax.
We hope at least few of our suggestions may be looked in to, while framing tax policy.
Dr. K. SHIVARAM
(Reproduced with permission from the AIFTP Journal – June 2009 issue)