CIRCUIT BREAKER. Tax terrorism and the aam aadmi

Keen on convincing foreign investors that India is business-friendly, the BJP government has been at pains to dissociate itself from ‘tax terrorism’. It has promised not to pursue transfer pricing cases with Vodafone and several other multinationals. Foreign investor complaints about GAAR (General Anti Avoidance Rules) and KYC norms have been patiently heard.

Now that the big guys have had their say, can the Centre lend its ear to the individual taxpayer please? The small taxpayer is subject to many subtle forms of ‘tax terrorism’ too. And he can’t incorporate holding companies in Mauritius or hire international lawyers to defend himself.

Speaking to half-a-dozen ordinary taxpayers across the country — senior citizens, financial advisors, small businessmen and investors — revealed that none of these people actually objected to paying taxes. Yet all of them had had at least one unpleasant run-in with the tax department.

One piece of mail that is guaranteed to send a chill down any householder’s spine is the brown paper envelope (or the password-protected email) containing the dreaded notice from the tax department.

Indian tax laws have armed tax officers with a battery of reasons, based on which they can serve notices on taxpayers at their discretion. The reasons can range from suspected evasion of taxes on big-ticket transactions to an arithmetical error or even a discrepancy in the department’s records.

Such demand notices require response within 30 days and often need you to rush to the assessing officer with all the relevant papers. Yet, the taxman can, and often does, serve such notices at random.

Many investors, for instance, have received a summons from the department for making a ‘high-value’ transaction during the year. Even if you reported all your income and meticulously paid taxes, you can be ‘scrutinised’ for holding over ₹10 lakh in a bank deposit, making mutual fund investments of over ₹2 lakh, swiping your credit card for ₹2 lakh or selling property worth ₹30 lakh or more in a year.

What is the sanctity of these threshold levels and aren’t they ever revised for inflation? Don’t ask.

Then, you can also be held accountable for slip-ups by your employer or other entities who are supposed to deposit tax dues on your behalf.

Assume you were employed with a cash-strapped company like Kingfisher Airlines, which ‘forgot’ to deposit your share of tax with the exchequer. You can be pulled up for it.

If that sounds unfair, there’s more. Sometimes the tax department’s notice never reaches you. But you are still expected to respond to it within 30 days! If not, you can be branded a ‘taxpayer in default’ and charged interest and penalties.

Swooping down on high-value transactions and looking for discrepancies in taxes may be the department’s way of widening the tax net. But given that many taxpayers who are served notices have not actually committed a crime, is it really necessary to subject them to hostile treatment?

First there is the high-handedness. “Why should there be a summons to appear in person if all they’re looking for is a document? I can send scanned documents through email, instead of taking off from work,” says one harried businessman who received the dreaded notice just ahead of New Year’s Eve. He spent six hours cooling his heels at the tax office, only to prove there was nothing wrong with his tax payments.

Small businessmen have a torrid time coping with not just income tax, but also with sales tax and excise officers.

A self-employed professional says: “If an assessing officer has made up his mind, he can easily find loopholes in your accounting system, expense claims or tax calculations. The rules are elaborate and the officer has sweeping powers to call for any document, however trivial.” He recalls being grilled by an officer for submitting a bill for ₹100 from a Xerox centre which didn’t quote a service tax number!

Then, there is the fact that assessees are expected to preserve documentary evidence for unrealistic periods of time.

The department can serve individual taxpayers with demands relating to any transaction made in the last seven years. One Mumbai-based portfolio manager recalls: “They asked me for contract notes on all my stock market transactions for the last five years. Thankfully, I could produce them.”

Corruption in the department is a common complaint too.

One financial adviser talks of the difficulty of getting anything resolved with the local tax office (including large refunds) without shelling out a bribe. “Even where my clients haven’t made a mistake, they are simply so stressed out about dealing with the tax officer that they hire a mediator.” The mediator ‘settles’ the matter with the official for a ‘fee’.

As the tax department migrates to electronic systems for filings, demands and refunds, some of these issues could get ironed out. But that still wouldn’t solve the problems of the elderly.

Changes to tax laws in recent years have made it mandatory for all persons with taxable income to file their returns, irrespective of their age.

Thus, those aged 60-plus are required to file their returns if their annual income exceeds ₹3 lakh and 80-plus seniors have to oblige if they earn ₹5 lakh. And it doesn’t matter if they earn all their income from bank deposits. Even if their income is exempt, they’re still not out of the woods.

To prevent the bank from automatically deducting TDS, they need to submit form 15H with each of the banks they deal with.

If a bank delays acknowledgement or wrongly deducts taxes, getting a credit can be a multi-year exercise.

Now many of these issues can be resolved online. But given that many seniors aren’t internet-savvy, it causes quite a lot of unnecessary stress.

The most galling aspect of the above instances is that they only affect that minuscule proportion of the Indian population which actually pays its taxes. Only 3.5 crore of 120 crore Indians pay income tax. So isn’t it ironic that they are at the receiving end of draconian tax laws and an insensitive bureaucracy?

As the finance minister puts the finishing touches to this year’s Budget, maybe the tax sops can wait. If the tax department can be persuaded to treat all small taxpayers as innocent until proven guilty, that would be reason enough to rejoice.

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