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Simplifying tax rules: Govt needs to put an embargo on retrospective law to past cases

By Frank D’souza

Over the years successive finance ministers have aspired for simplification of tax laws. In the process many committees have been set-up and these committees have provided suggestions for simplification of tax laws. Expert committees or panels under the chairmanship of Raja Chelliah, Vijay Kelkar, Dr Parthasarathy Shome, Justice AP Shah, Ashok Lahiri have come out with many reports over the years. These reports have covered a plethora of tax issues and suggested simplifications along with explaining the rationale of these recommendations.

Certainly simplification is not just local aspiration but it has also been the goal of governments globally. Take the examples of UK which has set-up an Office of tax simplification, New Zealand has set-up the “Taxpayers simplification panel”, USA which like India has had expert committees and other countries like France, Germany, Australia. As recent as last year Brazil has launched its tax simplification measures called the Simples Nacional which is an optional taxation regime for certain companies.

 Simplifying tax rules: Govt needs to put an embargo on retrospective law to past cases

During his speech in the Union Budget 2016 on Monday, the finance minister has stated that government’s agenda for the next year is to ‘Transform India’ and this transformative agenda has nine pillars. Among the nine pillars, ‘Governance and Ease of doing business’ and ‘Tax Reforms to reduce compliance burden with faith in the citizenry’ are two pillars. The thrust of the proposals falls in nine categories, of which two categories are ‘Reducing litigation and providing certainty in taxation’ and ‘Simplification and rationalization of taxation’.

The finance minister has said that he has accepted “a number of recommendations” of the Easwar Committee which was set up in October 2015 with a mandate to make recommendations for simplification of tax laws. Simplification of tax laws has two components viz Simplification of the Procedural provisions and that of the Substantive provisions.

Procedural provisions of the Income-tax Act, 1961 deal with collection / recovery of taxes, reporting of such collection of taxes, refunding of excess taxes collected and administrative processes involved in assessing the taxes so collected. These procedural aspects of the tax law have a direct link to the ease of doing business.

The budget proposals have proposed procedural simplification in areas like the rationalization of the withholding tax provisions, exemption from the requirement of non-residents having to obtain PAN to receive payments without penal withholding, legal framework for paperless assessments, speedy disbursement of refunds out of appeal effect, etc. However, among other things the Finance Minister has missed the opportunity to bring about changes in the following areas:

(a) amendment to forms to provide space for making disclosures
(b) simplification of procedures for amending, rectifying TDS returns
(c) possibility of making a fresh claim during assessment proceedings
(d) limiting the Revenue’s ability to re-opening of assessments on the grounds of audit-objections
(e) process of adjustment of refunds against outstanding demand

Second type is the substantive simplification which involves issues of interpretation of laws. While the intention of law makers should be to draft laws which are clear and unambiguous, interpretational differences do arise. These interpretational differences translate into disputes between the tax payer and the Revenue. The possibilities for amendments are therefore on two types, one focusing on dispute prevention and secondly those which focus on dispute resolution.

As regards dispute prevention the budget proposals include the introduction of presumptive taxation for professionals, simplified taxation option for new manufacturing companies, deferral of POEM. These simplifications are certainly welcome, but surely more could have been done in this area. For instance announcing the deferral of ICDS would have gone a long way in preventing potential disputes. The government must appreciate that the businesses are already dealing with changes to the new Companies Act and Accounting standards.

As regards measures for dispute resolution the finance minister has announced the new Direct Tax Dispute Resolution Scheme. The lingering headache of the retrospective amendments is also sought to be addressed through this scheme. Further, its been clarified that MAT is not applicable to foreign companies. Once again the finance minister could have exploited outcomes of the first report of Easwar committee and to start with could have brought in clarity regarding taxation of surplus on sale of shares and securities, re-considered the disallowance of expenses incurred to earn exempt income which has suffered DDT.

The budget proposals include setting-up of a high-level committee chaired by the Revenue Secretary to oversee fresh cases of where tax officers apply retrospective amendments and curtailing of the discretion of the tax officer for levying penalty. This underlines government’s commitment to responsible use of the retrospective tax laws to avoid any undue hardship to genuine taxpayers. However, a more appropriate approach would have been to state an embargo on applying retrospective law to past cases.

The orders passed by the Dispute Resolution Panel (a collegium of three Commissioners) (‘DRP’) were not appealable and the result was a spate of adverse orders passed by the DRP confirming the orders passed by the Tax officers. The law was subsequently amended to provide the tax officer a right to appeal against the orders of the DRP. The government has now proposed to revert to the earlier provisions and the tax officer will no longer be empowered to file an appeal against the order of the DRP. A question which needs to be asked here is how different would this be from the original experiment.

Overall, the Union Budget 2016 has taken steps towards simplification of the Income-tax law. Government has once again displayed the intent, but the actions of the Revenue will speak louder.

The author is partner, PwC India.

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Updated Date: Mar 02, 2016 13:22:20 IST