The Hindu Business Line : Three keys to direct tax reforms

The tax code defies simplification, and a new one drafted with precision and simplicity is imperative. Tax administration needs toning up, with perhaps the Tax Department outsourcing most of its functions, considering the world-class ITES now available in India. The National Tax Tribunal is the first step in a dispute resolution mechanism. But to bring finality to tax litigation, there must be Supreme Court Benches to dispose of appeals expeditiously. H. P. Ranina says the Finance Ministe r will indeed have a tough task ahead doing all this.

THE DIRECT tax proposals proposed in the Finance Bill, 2005 may be already in print reflecting the thoughts and aspirations of the Finance Minister who is wedded to the ideals of progress and reforms. However, this is only the end of the beginning. The real tasks before the Government are yet to be implemented.

Three main objectives should be borne in mind while levying taxes. First, compliance by the tax-payer. Tax laws must not be so complicated and cumbersome in their operation as to cause needless hardship to the people which makes compliance difficult. In India, this objective has been wholly overlooked.

Second, the Government must levy only the minimum tax which is necessary for the national good. Lord Macaulay, in the famous Minute, which he wrote in India when he was here between 1834 and 1838, expressed the same thought when he said that all taxes are burdensome and the burden is on the government to prove that a particular levy is justified.

Third, certainty and clarity. The laws imposing taxes must be so precisely and clearly worded as to make the taxpayer understand what exactly is the burden he is called upon to bear.

Modern fiscal policy pursued by most progressive countries is to make revenues grow, not by increasing income-tax rates but by making incomes grow and by enlarging the tax base. In other words, tax revenues must be made self-generating.

Turning to the first canon of taxation: In the last 60 years, our tax laws have reached new heights of complexity. That tax administration has virtually broken down is apparent from the fact that tax returns filed are misplaced, sometimes files are untraceable, wrong debits and credits are given, notices are served for alleged tax defaults despite tax-payers paying their taxes by the due dates, and so on.

Taking full advantage of the weakness of the tax administration, tax defaulters thumb their noses to ensure that they are not caught. Compliance is, therefore, restricted to those few who have a sense of good citizenship and to those who have no choice but to comply with the law, as in the case of salaried employees.

The Income-Tax Act, 1961 has around 600 Sections. Some of the existing provisions are so long that they run over seven-eight printed pages. The drafting is such that virtually every provision has been the subject matter of litigation pertaining to its interpretation. Such litigation drags on for a period which is equal to one-third or more of the average life expectancy in India. The Assessing Officer should be made accountable for the high-pitched assessments, once the second appeal is decided. Based on the success rate of appeals, cases of high-pitched assessments, delay in issue of refunds, etc., some provisions for accountability of tax officials should be urgently brought on the statute.

Poor drafting of laws results in even courts giving conflicting and divergent interpretations leading to grave uncertainties in law. An Assessing Officer is required to determine the assessee's correct income while framing his order. This is virtually impossible considering the fact that the process of assessment begins at least a year after the end of the financial year in which income is earned. The evidence which the Assessing Officer has is only the information disclosed by the tax-payer himself. Few external aids are available to the Officer. The circumstances in which the state of the law is at present, the Kelkar Committee task force had been left with no alternative but to stress on voluntary tax compliance. Reducing the rates of taxes and abolishing the "exemption raj" may be one of the solutions in the circumstances prevailing today.

However, it will only widen the gap between honest tax-payers and persistent defaulters who are not inclined to pay, however low the rate of tax may be.

The first thing the Finance Minister needs to do is to put his house in order. If it is not possible to do so with the existing machinery and personnel, outsourcing of certain functions is the only alternative. When the tax administrators pull up their own employees, the latter threaten non co-operation, go-slow tactics and even strikes. On the other hand, if some functions are outsourced, strict compliance can be demanded from the agency which alone is responsible for the discipline of its own staff.

The tax department would, therefore, gain substantial support by outsourcing functions, especially those which are routine in nature but high in volume. This would at least ensure that the requisite data and statistics are available to those who are in charge of new tax policies. The direct tax policies suffer from five patent defects which can be easily remedied, but which the Government has so far resolutely refused to tackle:

Absolute uncertainty; changes in law, which are as unpredictable as they are frequent.

Complexity which verges upon incomprehensibility.

Excessive and cumulative burdens which make dishonesty immeasurably more rewarding than integrity and hard work.

Injustices inherent in fatuous laws; and arbitrary provisions which are not based on any discernible principle of taxation.

An administration marked by petrification of discretion and paralysis of the will to do justice.

Tax evasion is reprehensible; it is social injustice by the evader to his fellow citizens. Arbitrary or excessive taxation is equally reprehensible. Tax evasion aggravates arbitrary taxation; and arbitrary taxation aggravates tax evasion. To break the vicious circle, while there must be every attempt to check evasion, there must equally be every attempt to stop arbitrary taxation.

Speedy disposal of disputes is also necessary to instil confidence among honest tax-payers and to recover revenues. Lakhs of tax cases are clogging the High Courts and the lower appellate authorities. It is expected that the National Tax Tribunal Bill, after being suitably amended to put the Tribunal on a par with High Courts, will be passed in the Budget session of Parliament. Once this is done, the Tribunal can start functioning by July 1, 2005, at least in all the metros.

This would be the most effective step to reduce the backlog of pending cases in High Courts. It would be equally necessary to request the Chief Justice of India to constitute two special Benches in the Supreme Court to dispose of appeals from judgments passed by the NTT. The reason is that the Tribunal would be able to dispose of hundreds of cases every month and if there is no expeditious disposal by the Supreme Court, the delays will gather at the final appellate level.

The Finance Bill, 2005 should provide an option to citizens to bypass all the existing appellate levels and go before a specially constituted Tribunal whose decision would be final and non-appealable. If men of proven ability and integrity, specialised knowledge and sturdy independence are appointed to constitute such a forum, thousands of pending appeals may be withdrawn and referred to the Tribunal which would be able to dispose of a large number of cases every year.

In a nutshell, the process of reforms is yet to start. Simplifying the present law, which has become complicated, is virtually impossible. A new tax code drafted with precision and simplicity is the crying need of the hour.

Second, the Finance Minister has to take the lead in toning up his tax administration, initiating administrative reforms without making cosmetic changes. Outsourcing of most of the functions of the Tax Department seems to be the best solution, taking full advantage of the world-class information technology-enabled services which are now available in India.

Finally, dispute resolution has to be given its due priority. An alternative dispute resolution mechanism may also be considered. The National Tax Tribunal is the first step in the right direction. However, to bring about finality to tax litigation, the Apex Court should also have adequate number of Benches to dispose of appeals as expeditiously as possible.

The tasks before the Finance Minister are indeed daunting. Yet, he is one man who can meet the challenges and come out the winner. The nation is looking forward to this.

(The author is a Mumbai-based advocate specialising in direct tax laws.)

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