That the government has shown a determination to widen the tax net is commendable. Reform of certain aspects of the Direct Taxes Code is overdue. Often, lack of clarity in the law allows companies to cling to debatable interpretations that cause the intent of the legislation to remain unfulfilled. Many of the current requirements are incapable of dealing with a vastly more complex, globalised economy. In addition, there is a climate abroad against widespread tax evasion. This Budget, given its focus on fiscal consolidation, has thus attempted to expand and rationalise revenue collection. However, in doing so, it has greatly expanded the discretion available to officers of the Department of Revenue. This is a wrong approach and one that runs counter to the essential spirit of reform: which is a decrease in unnecessary regulatory authority, and the minimisation of discretionary power and arbitrariness.
Several provisions of the Finance Bill are problematic when seen in this light. Consider the decision to expand the scope of transfer pricing taxation. True, many Indian companies have restructured their operations to take advantage of variations in tax laws geographically and across sectors. Reducing the incentives for such activities will widen the tax net and improve efficiency, because companies will be structured on the basis of operational logic and not rent-seeking. But such a widening, if accompanied by an increase in discretionary authority for the officials on the spot, will likely increase harassment, bribery and investment paralysis, and not revenue and efficiency. Clause after clause in the Memorandum explaining the Finance Bill repeats variations of the time-worn and discredited phrase “to the satisfaction of the assessing officer” — a satisfaction that, as any taxpayer will attest, is not all that often aligned with the facts of the case. In one particularly puzzling example, it appears that small unlisted companies are now required to ensure that they have on file an explanation from all their investors of where the money they are investing comes from — or the assessing officer can declare their own return unsatisfactory. This shifts the burden of detection of evasion unacceptably onto the general public.
The introduction of a general anti-avoidance rule, or GAAR, which is common in many other jurisdictions worldwide, is of particular interest. It attempts to codify the situations under which an obvious tax-avoidance scheme, with no independent commercial requirement, is constructed. On this occasion, at least, the assessment officer’s powers have been somewhat circumscribed, with an approving panel required to rule on whether a tax-saving arrangement is permissible within six months (not including actual time of proceedings). Similar systems have worked elsewhere, but it remains to be seen whether the additional constraints on revenue action will make up for the additional powers. Overall, however, the drift of the Budget towards discretion is problematic. The blame lies with the political leadership. If the executive appears weak in implementing or articulating reform-mindedness, the officials of the state will seize the opportunity to expand their power. It may not expand the revenues of the state, but it will certainly enrich many of its representatives.