The Hindu Business Line : Putting forms to the acceptability test

Through a Notification, No.SO762(E), dated May 14, 2007, the Central Board of Direct Taxes introduced eight new return forms to be filed by various categories of assessees for the accounting year 2007-08.

These returns are valid for one year only after which the position is to be reviewed by the CBDT.

The new return forms have evoked considerable resentment amongst taxpayers — mostly those used to the simple Form 2D (Saral), as the new forms are longer in size, requiring more details to be incorporated in the returns themselves, and look complicated.

There has been much of a hue and cry from small and middle-level taxpayers, who cannot afford to engage the services of tax consultants/chartered accountants for a fee.

The services of Tax Return Preparers (TRPs) too have not been found to be of much use in giving assistance in filling up these forms as these were not in use when TRPs were trained.

The yardstick to evaluate the efficiency of a tax system is simplicity, stability and acceptability of the system to the taxpayers. If these needs are not met, and tax-payers are unhappy with the system, the tax administration needs to redress grievances in time, else it will lead to evasion, avoidance of tax, and shrinkage in the tax base.

On the new forms, two judgements (one final and one interim) have been pronounced by the Gujarat and Allahabad High Courts. The fact that the taxpayers have moved the High Courts speaks volumes about the resentment created and the gravity of the problem.

Gujarat HC’s decision

Before the Gujarat HC, in the case of All Gujarat Federation of Tax Consultants vs UOI (2007 163 Taxman 196 Gujarat), issues were raised on two counts, namely: (i) the forms are complicated and (ii) the condition prescribed that if there was some defect in the forms or wrong information was found to be given, such forms would not be accepted by the I-T Department is onerous.

On the first issue, the contention was not accepted by the court because 6,77,330 taxpayers had, by July 29, 2007 (the last date being July 31, 2007), out of about 25 lakh taxpayers, filed returns of income. It needs to be said that compliance by nearly 26 per cent of the taxpayers cannot be considered as a representative sample to come to the conclusion that the return forms are not complicated.

Rather, the figure of 6,77,330, with only two days left for compliance, supports the view that the return forms are complicated and hence compliance became slack.

On the second issue, the court has directed the department to accept the return forms submitted by the taxpayers. After acceptance, if on scrutiny it is found by the officer concerned that there is no genuine difficulty on the part of the taxpayer in giving the details required in various columns, those forms may finally be treated as not filed.

Allahabad HC’s decision

In Om Prakash Tewari vs UOI (2007 163 Taxman 199 All), the writs have been admitted and the Government has been given four weeks’ time to file the counter affidavit. In the meantime, the court has passed an interim order saying that if the returns are filed by the petitioners on Saral 2D forms, the same shall be entertained by the income-tax authorities and shall not be rejected on the ground that they are not in the prescribed forms ITR1 to ITR8.

Design concepts ignored

Acceptability is an important attribute of a successful tax system. In the report of the Economic Administration Reforms Commission (EARC) (1980-83), the following observations have been made concerning acceptability: “A tax system cannot be satisfactorily implemented unless it is generally acceptable to the target taxpayers, i.e. taxpayers towards whom the tax system is targeted…… Given the extent of willingness to comply, the acceptability of a tax structure or system will crucially depend on the perception of the population of its fairness — in its inherent structure as well as in the system it operates, the reasonableness of its burden and its simplicity, which lowers the cost of compliance.”

Judged from these characteristics that a tax system should have, the new return forms fail miserably.

The EARC has also commended simplicity, certainty and stability. The forms fail on these counts also. These are not simple, uncertain (as the two HC orders show) and lack stability as these have been prescribed for one year only.

After facing difficulties for 2007-08, taxpayers will have to keep themselves prepared for a similar onslaught next year. One needs to ask the I-T Department whether it is just and fair to deal with taxpayers in this manner. The answer can only be a firm ‘No’.

Long and complicated

The most vocal criticism regarding the new forms has been that these are long and complicated for the average taxpayer and such criticism is justified if one goes through the numerous columns in the forms and instructions for filling up the same.

The orders of the two High Courts of Gujarat and Allahabad show that criticism of the forms is not without force. The CBDT needs to consider the issues raised as a large number of returns is yet to be filed.

(The author is a former chairman of CBDT.)