Respected Finance Minister
“Terrorism Tax” is a well-known phrase used to define a specific tax levied with the idea of collecting money to fight terrorist activities. But in January this year, the country got to know an absolutely new term and that was “Tax Terrorism”. This was courtesy a comment made by the current Prime Minister at an industry interaction at Ficci, wherein he stated that this needs to end. This phrase, you would appreciate, has gained wide spread acceptability and support (for obvious reasons) in the past few months.
With BJP now firmly in power (and that too with an overwhelming majority), tax reforms seem to be high on the priority list. But before you embark on tax reforms it would be wise on your part to dwell on “Tax Terrorism”. For a layman this term implies a situation where the taxman uses his powers to fleece tax (or rather, extract more than what is due) from an honest taxpayer. This may be either in the form of unjust and inequitable tax laws or by enforcing the tax law on the general public in a harsh manner, which generally happens when the taxman views every transaction with suspect.
There is no doubt that over the past few years, the Income Tax department has come under severe criticism from all quarters for its overtly aggressive attitude in not only enforcing, but also in formulating the law. And of course the handling of the Vodafone tax controversy and the consequent retrospective amendments are the biggest examples of the slip shod manner of functioning for which the tax department has no excuse. In fact, the Vodafone tax dispute is a classic example of both shoddy handling as well as policy making.
While doing an impartial assessment of the policy formulation over the past few years (of course leaving the “retrospective” controversy aside), it is observed that there is no great terrorism, which has beenpracticed by the tax department. Instead what has been done by the Income Tax department over the time is introduction of a series of measures which are aimed at curbing tax avoidance. These may include SAAR’s (Specific Anti Avoidance Regulations) or GAAR (General Anti Avoidance Regulations) and also remember that all these measures are not peculiar to India alone. These have been used quite effectively the world over to curb tax avoidance. Barring aside a few policy initiatives, none of the recent changes can be termed as anything near to tax terrorism.
However, if one studies the enforcement of the tax law, it seems “Tax Terrorism” looms large. Over the past few years there has been a tendency of the taxman to apply anti avoidance regulations to one and sundry. A case in-point is the Transfer Pricing Regulations. Introduced in 2002 when the BJP government was in power, disputes under this have risen exponentially over the years. As per the finance ministry statistics the Directorate of Transfer Pricing has detected mispricing of Rs 67,768 crore in the two financial years ending 2011 and 2012 as contrasted with Rs 1,220 crore in the year ended 2005. This humungous increase cannot be a normal phenomenon propelled by the errant businessman. A little deeper analysis in the enforcement of the Transfer Pricing Regulations reveals that the taxman has followed a general assumption that whoever is covered by these regulations must have employed some evasionary or tax avoidance techniques in business. This is a dangerous but commonassumption of the taxman and calls for urgent correction. This is what is the real “Tax Terrorism” which needs to be controlled and curbed altogether.
“Tax Terrorism” lies not in policy formulation but in the enforcement. For a number of years, the concept of enforcement has been overlooked but please do not neglect this area any further. Reform the enforcement process in a manner so that the taxman appreciates the commercial principles behind a business transaction and learns that the application of the SAAR’s has to be more targeted then general.
The January comment has set the tone and the Indian taxpayer is more than eager to see it implemented. Please go ahead and initiate actions which make it clear that the Indian taxman is a “Tax Army” – equipped with the ammunition and also the knowledge of when to use it and not a “Tax Terrorist” who indiscriminately uses the tax laws and causes mayhem.
Regards
Tarun Chaturvedi
