Consolidate changes for new IT Act

TAXING MATTERS

Speaking at the Assocham's meeting on March 5, Finance Minister P Chidambaram said that the government would come with a brand new income tax Bill by December end or January 2006.

However, an amendment Bill to clean up a number of non-revenue provisions will be passed in April-May this year. The prospect of a new law on income tax raises quite a few concerns.

Firstly, a consolidated view for the entire Act is necessary. The IT Act should not be changed in segments. If the non-revenue provisions could have remained in the Act for so many years, these could as well wait for some more time and the "cleaning up" work can be taken up along with the new Act.

The next aspect relates to time-frame. Chidambaram's past experience becomes relevant in this regard. By an order dated August 6, 1996, an expert committee was constituted "to examine the existing income-tax structure to suggest changes that have become necessary, particularly in the light of new economic policy and tax reforms".

The group was to submit its report on the proposed new law by December 31 (in less than 5 months). This period was later extended to February 28, 1997.

Since the time given was woefully inadequate, the draft of the new Act was greatly deficient. So, the expert group's report and the draft of the new Act had to be consigned to the archives of the finance ministry and the time, effort and money that went into it was wasted. Hence, it is obvious that more than a few months will be necessary if really a well-drafted income-tax law is intended.

More time is also necessary for making the new changes acceptable to the taxpayers. Tax changes cannot be a one-sided act. A white paper on the proposed changes should be issued for public discussions (as was done in 1985) and only then should the "brand new Act" be finalised.

Collective wisdom of the government, the taxpayers, tax advisors, trade and industry's representative, tax economists and policymakers needs to be tapped for a really good IT Act.

Drafting a new IT Act cannot be done in-house or by part-time members, as has been attempted in the past. A properly constituted commission, comprising a full-time chairman of the stature of the Supreme Court chief justice (as was done when Wanchoo Commission was appointed), two permanent members (with a background in economics or accounts) and a full-time secretary, should be appointed.

The panel can be assisted by part-time members from other disciplines and should be given a minimum of 16 to 18 months to examine the issues from all angles. It should issue the suggested white paper and have interactions with various persons and groups before formulating its recommendations.

The terms of reference for the consideration of the committee need to be carefully drawn and this requires vigorous home work, which was neglected in the past. Here are two instances of efforts which stumbled to poorly drafted terms of reference.

The Wanchoo Committee was appointed merely on a basis of a resolution, which said that "a committee for experts is appointed to examine and suggest legal and administrative measures for countering evasion and avoidance of direct taxes".

An expert group was appointed by Chidambaram in 1996 and asked "to examine the existing Income Tax Act structure and to suggest changes that have become necessary, particularly in the light of new economic policy".

No meaningful recommendations and changes in the tax laws can be made on the basis of such vague and general terms of reference. Unless a background note detailing the deficiencies in the existing system, the anomalies, the constraints in implementation, the problems posed by court decisions and the expectations from the tax system, is prepared, no meaningful changes in the IT Act are possible.

Another point of consideration is the numerical numbers in the existing Act need not be changed. The 1997 Expert Group gave entirely new numbers to the various existing sections, which have, by now, become widely known.

While doing so, it makes reference to tax decisions in reports, CBDT's circulars, notifications, rules issued by the government, tedious and time-consuming. Preparing comparative tables, charts, etc. require considerable and strenuous exercise.

So, new numbers should be given only to new provisions. The numbers of sections to be deleted should be frozen. This arrangement was followed in the case of Internal Revenue Code (IRC) in the United States and it can work for the new Act too.

The new Income Tax Act is intended to provide a tax legislation that would be the basic frame for years to come. A hurried approach is not advisable. The suggestions mentioned here should be given serious consideration if the aim is to give a well-drafted Act to the country.