A non-adversarial tax regime

One shouldn’t be carried away with the notion that the taxpayer is a “customer” that the revenue department “services”. Tax is an obligation — the so-called consumer here cannot exercise any choice about what to ‘buy’ or from whom. Yet, this doesn’t justify the current approach of tax authorities, which is blinkered and almost solely focused on revenue targets. Since accountability is understood only in terms of the shortfall in revenue collections, the ultimate victim is the honest taxpayer, as the Parthasarathi Shome-headed Tax Administration Reform Commission has pointed out. The panel, in its report submitted to Finance Minister Arun Jaitley, has provided a lucid analysis of why the revenue department adopts an intrinsically adversarial posture towards taxpayers. Essentially, it attributes this to an incentive structure that makes meeting revenue targets the sole criterion for assessing performance. In turn, this promotes risk aversion. Whenever revenue gaps arise, there is pressure from the top permeating down to commissioner-level to make up the shortfall, eventually leading to infructuous ‘protective’ tax demands.

While this kind of adversarial approach may insure officials against future liability and vigilance action, it inflicts huge collateral damage on the country’s investment climate. We have seen this especially in the Vodafone case, where the previous government retrospectively amended the tax law to cover an acquisition in India that the company had undertaken through an offshore transaction. The same antagonism towards taxpayers is also borne out by the sheer number of disputes: there were over 2,67,000 income/corporation tax cases alone pending before the various appellate authorities and courts until 2012-13. Many of these have been pending for as long as five years and the revenue department’s success rate has been below 25 per cent even at appellate tribunal stage. A neglect of accountability in raising tax demands contributes to an environment of tax uncertainty and increased costs of compliance for businesses by way of having to allocate manpower and resources towards dispute resolution/avoidance.

The new government at the Centre has the opportunity to simplify our tax laws that reduce the scope for disputes between taxpayers and revenue authorities. The objective should be to encourage voluntary compliance and severely penalise tax evasion. Among other things the coming Budget could do is to dispense with all retrospective tax amendments and clarify that any new changes would apply only prospectively. This, along with clarity on introduction of a new Direct Taxes Code and a roadmap for the implementation of a nationwide Goods and Services Tax, will go some way in creating a non-adversarial tax climate conducive to growth and investment. In the long run, this is the only sustainable path to revenue generation.

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