America has ‘turned out’ some great people, but there are others not so great that ought to be ‘turned out’. This clearly seems, to sum up, the sentiment as Donald Trump stormed into the White House. On inauguration day, the aerial pictures revealed the real picture – few turned up for the swearing-in ceremony, but millions took to swearing in the street in protest. On his first day in office, Trump exited the Trans-Pacific Partnership, a trade agreement that took years of negotiation. He has signed documents for the 3,200 km Mexican Wall and is tightening visa norms. The world is watching with crossed fingers. Back home, seat sharing agreements and election rallies are being watched closely, while the media is all abuzz with the budget expectations. Here in India too people are anticipating the future with crossed fingers.
Tax Reform - Are we expecting too much?
Before we speculate about the impending budget, let us first examine a very core issue that plagues India. Tax Reforms, is a crying need in India today. The nebulous world of Indian taxation is a major impediment in opening the floodgates of investment, both by Indian companies and multinational giants. Gauging the pulse of the situation, Prime Minister Modi has asked officials to “move towards digitization” in a bid to make tax administration better and more efficient. He also stressed the need to build a “bridge of confidence” between taxpayers and officials so that taxes are paid without fear or harassment. He urged tax officials to act as “mentors of taxpayers” and not treat them as tax evaders.
So, what is really happening at the grassroots level? Are individuals and corporate India enjoying a better tax experience? Is there an eagerness or great reluctance towards the task of paying tax? The real truth is nothing much has been done. As Arvind Panagariya, Vice Chairman of NITI Aayog has admitted, “We need to simplify our tax system and codify rules with precision, so that room for interpretation by tax officials is minimized.” He advocated the usage of data analytics for audits, instead of letting officials taking a call…the elimination of the interface between officials and the tax payer would minimize the scope of corruption.
The key thrust of tax reform should be on re-drafting the tax statutes with utmost clarity leaving minimum room for misinterpretation. Taxpayers interpret the tax statutes to minimize their tax liabilities while tax officials focus on maximizing revenue generation. Needless to say, this has resulted in disputes and litigation – the Finance Minister in his budget speech in 2016 declared that there are about three lakh cases pending with the first appellate authority with tax liability amounting to a whopping Rs.5.5 lakh crore!
It was Nani Palkhiwala, the eminent lawyer who once remarked: “Don’t call me an expert in income tax laws. Indian income tax laws are drafted in much of a subjective manner that no one can be expert in that.” Thirty years have elapsed, but the situation is very much the same, if not worse! The subjective and arbitrary interpretation of tax laws is just one side of the coin. In India, tax officials are not penalized for misinterpretation of tax statutes. On the contrary, they are protected even though they are responsible for incorrect and undue demands. This lack of accountability has emboldened tax officials, leading to much corruption at many levels. Remedial action in the form of an appeal is available against the order, but not against the tax officer. Moreover, the taxpayer must endure interest, penalty, and prosecution all because a tax official decided to read between the lines!
Taxtortion flourishes in India! There are so many examples of misinterpretations of sections by the assessing officer, leading to a legal logjam. Predictably there are lakhs of cases…but interestingly most of the disputes were settled in favour of the tax payers. It is a known fact that nearly 80% of the assessments get reversed either at the first appellant level or the second appellant level.
Minimum Alternate Tax (MAT) is another classic case of how the government is demanding a tax in an extremely arbitrary manner. MAT was devised to tax companies that took advantage of the numerous exemptions leading to little or no tax liability. The predominant view was that this provision did not apply to foreign companies. Then in 2012, the Authority for Advanced Rulings made MAT applicable to all companies. In 2014 tax notices have been slapped on companies to cough up around Rs. 40,000 crore. Many more demand notices are being issued. Is the government serious about attracting international investment with such haphazard, arbitrary tax claims? We now have GAAR and government is aware what effect it can have on investment sentiments. But it has still thought it fit to go ahead by issuing set of 16 clarifications to allay investor fears over GAAR regime. But subjectivity and powers of officers still remain without accountability. What is the guarantee that GAAR will not be misused?
A senior leader of a traders’ association strongly felt that businesses currently were harassed and victimized by the cascading demands of multiple tax authorities. He said: “Most of the time we are busy in complying with tax formalities, collecting taxes, depositing taxes, submission of forms, pursuing money stuck in the system…that we don’t find time to do business!” Sachin Bansal, co-founder of Flipkart – India’s number one e-commerce site echoes the same thinking. He believes the idiosyncratic tax codes that his company must work around are a serious bottleneck to doing business…there’s double taxation at Karnataka warehouses, a $75 limit on shipments to UP and confiscation of goods and cash in Kerala.
This chaotic situation is set to change with the Goods and Services Tax which is expected to be implemented in the second half of this year. It is clearly a winner in clearing the tangled thicket of tedious state after state tax codes. It has been rightly hailed as “India’s reverse Brexit moment” as it replaces 15 existing state and central taxes, paving the way for India to become a single economic zone. It is slated to attract foreign investment, reduce capital goods cost, boost manufacturing and exports and create employment. But as Arvind Subramanian, the government’s chief economic advisor warns that GST will be “fiendishly, mind-bogglingly complex to administer.”
It is my hope, an ardent hope that the government will diligently re-look at tax statutes and embark upon a concerted plan to fine-tune them so that they are neutral, precise and completely objective. Introducing an amendment that will ensure accountability of tax officials will be a step I think in the right direction. This I believe is as important as the many sops, exemptions, and concessions that I expect will be dished out in the coming budget to soothe the wounds of demonetization.
Golden Jubilee RRC – What a celebration!
It was Henry Ford who once said, “Coming together is a beginning; keeping together is progress; working together is success.” This 50th Residential Refresher Course was a testimony of those words. Let me thank all the speakers, team leaders, animators and participants of the recently concluded Residential Refresher Course in Jaipur. The level of participation was excellent and it was more like a National Conference with 145 out of 270 members from various cities other than Mumbai. I am sure we have all benefited in different ways from the invaluable insights and learning that came up in the many interactions. The highlight was the celebrations evening where Padma Shree CA T.N. Manoharan and Vice President of ICAI CA Nilesh Vikamsey enlightened the participants with their wisdom and experience. I can surely say that they poured their heart out through their eloquent speeches, reminiscing their association with BCAS and the RRCs. It was an ideal opportunity for us all to learn and relearn and to grow our professional network all across the country. Being the golden anniversary of the course, I hope it continues to sparkle in our minds and spark many innovative ideas and practices.
On successful completion of a momentous event at BCAS, I would like to end my communication with following lines by renowned spiritual mentor Mahatria Ra:
“In the journey of success, every finishing line is the new starting line. In your career, year after year, you have to prove once again. You’ve to challenge yourself once again. After every accomplishment, the heartbeat of success remains, ‘What next? What else? What more? How else?.”