Pranab's real message to taxpayers: we don't trust you

By R Jagannathan

Consider this: Let’s say the finance minister is giving you a tax break to encourage you to invest in life insurance. Many people do so to save on tax.

A few years down the line, the FM, who is spending “sleepless nights” over the size of the fiscal deficit, feels you are getting too much of a free ride. He announces that too many people are avoiding taxes by investing in life insurance. So, he will introduce a new rule to say that if the only purpose of investing in insurance is to avoid tax, the taxman can disallow that.

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Now, you may be among those tax-paying, god-fearing, water-drinking citizens who feel that every paisa of tax paid is good for the country, and you will continue to do what you were always doing: buy insurance if you need it, never mind whether there is tax saving or not.

But then, you could also be someone who doesn’t think insurance is a big deal. If there is no tax saving, you won’t buy insurance.

This, in essence, is what the brouhaha over GAAR is - the General Anti Avoidance Rule on taxation.

In his budget, the FM said: “I propose to introduce a General Anti Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel.”

A commonsense counter-point is this: How do you know my only intention is to avoid tax when I buy insurance? Of course, GAAR is not for individuals, but the principle is the same whether it is companies or individuals like you and me.

The GAAR change, in fact, underlines a key attitudinal shift that this budget has brought about from the past: the taxpayer will no longer be trusted. It is back to coercion and oppression by the bureaucrat in the name of ensuring tax avoidance.

Pranab Mukherjee has reversed the two-decades-old effort by the government to build trust taxpayers by making tax compliance easier.

Just look at the things Mukherjee did in this budget to destroy that trust.

• Apart from GAAR, he has said that investors routing money from tax havens will have to produce a tax residency certificate - as prescribed by the Indian taxman.

• He has made collection of tax on overseas transactions with underlying Indian assets retrospective to 1962. The ostensible reason was the reverse the Supreme Court judgment on Vodafone. But the law essentially says he may open old cases.

• He has made pricing of products bought or sold by related domestic entities subject to new scrutiny by the taxman. Earlier, only transfer pricing between foreign entities and Indian subsidiaries were subject to this scrutiny. Now everyone is fair game.

• In the name of tackling black money held abroad, the government has said that it can reopen any tax assessment relating to assets held abroad for upto 16 years.

• Tax will be deducted at source on purchases of gold and jewellery or immoveable assets beyond a certain value.

• Unexplained money, credits, investments, and expenditures will be taxed at the highest 30 percent slab of income.

We can certainly expand the list, but the simple point is this: Pranab Mukherjee, in his fight for more money, has sacrificed the principle of enhancing revenues by trusting taxpayers. Now, more coercive methods will be used, if needed.

What will be outcome?

Whenever the taxman is empowered to get more money out of citizens, there has been only one outcome: more extortion and generation of black money.

This is because unscrupulous taxmen can merely threaten to reopen some old transaction or seek to probe how firms arrived at prices and most people will choose to settle it with a bribe to avoid hassles.