The proposed amendments are aimed at pleasing influential taxpayers but introducing collaborative changes is a sign of pragmatism and will lead to reduced litigation.
T N Pandey
Former Chairman, CBDT
The revised DTC draft is a raw deal for salaried taxpayers who will continue to be deprived of standard deduction and will pay more taxes
Common taxpayers are completely frustrated with the way the government has muddled the work related to tax reforms and the enactment of the new Direct Taxes Code (DTC). The government has not been able to finalise this exercise which was started in 1996 when P Chidambaram appointed an expert group comprising seven officers of the Indian Revenue Service, a tax advocate and a retired law secretary to rewrite the country’s tax laws. The Income Tax Bill, 1977, drafted by this group was so deficient that it had to be abandoned.
Again in 2005, Chidambaram appointed an in-house committee of 5-6 revenue officers to work on a part-time basis for the tax reforms. This culminated in the Direct Taxes Code (DTC) in 2009. This created an uproar and Finance Minister Pranab Mukherjee had to promise corrections, which have been mentioned in the revised discussion paper floated on June 15.
Actually, the desire to get the taxes code drafted by a government-controlled body was apparent in 1996 and in 2005 — on both occasions, the independent commission to do this work was shunned. The Income Tax Act, 1961, was drafted by the Law Commission of India in two years after extensive discussion and debates.
In other countries also, tax reforms have been carried out with seriousness and in sufficient time. For example, the Canadian tax reforms began with the appointment of the Carter Commission in 1962 and climaxed in the passage of the Tax Reform Bill, 1971. The Canadian Tax Reforms passed through three major stages. The final stage began with a parliamentary debate on the white paper and ended with the enactment of the Bill 259 in 1971. The exercise regarding the code in India is quite in contrast to that done in Canada.
Obviously, the desire was not to have a long-lasting, growth-oriented, simple, efficient and stable tax code, but to have a tax code with an inbuilt flexibility to oblige. The discussion paper cites various reasons as to why the previous proposals were considered objectionable. Obviously, the grounds given earlier could have been conceived of even when earlier proposals were formulated in the DTC and considered desirable. These are now proposed to be amended, obviously to please different influential sections of taxpayers who could pressure the government.
The changes in many situations are not based on any cogent grounds. For instance, revised proposals for wealth tax were justified in DTC on the grounds of capacity to pay and to help capture tax evasion/avoidance. While reverting to the existing system, though it has been accepted that wealth tax is an anti-abuse measure, no reasons have been given for aborting the DTC proposal. Obviously, it did not suit the big taxpayers, and thus a retreat to the old system has been proposed. No ground has been indicated for changing the system of taxing capital gains.
But salaried taxpayers continue to get a raw deal. They will continue to be deprived of standard deduction, pay tax on enhanced valuation in respect of house facilities, value of leave travel concession, amounts received on encashment of leave on retirement or otherwise and medical benefits, which are exempt under the existing law. This indicates that those who cannot influence the government have to suffer.
There are many changes that are based not on merits but on personal views. An apparent example of personal likes and dislikes is the discard of rates of taxes mentioned in DTC as the regime at that time felt that this could provide stability and certainty to the system. The present finance ministry officers have now expressed the view that prescribing tax rates is the privilege of Parliament. That privilege does not get diluted when rates are given in the code because these can always be changed by annual finance Acts. Of course, such changes will have to be backed by reasons and not by the whims and fancies of the government.
Tax reform is a solemn exercise which cannot be carried out piecemeal. Certain questions need to be kept in mind: (i)what is intended to be achieved; (ii) how is it proposed to be achieved; (iii) what would be the effect of the changes proposed and (iv) how would this help in improving the economy and the system. It cannot be an exercise in groping for answers as the discussion paper shows. The type of changes proposed in the discussion can be achieved if considered imperative by an Amendment Act, rather than by upsetting an Act which has been in operation for nearly 60 years. The discussion paper is a big disappointment and is more of a cut-and-paste job.
Pranav Sayta
Tax Partner, Ernst & Young
The amendments to the tax code were a must because uncertainty about the tax environment could have affected India’s global trade
Perhaps one of the most notable initiatives carried out by the finance ministry in recent times is to involve the taxpayers in the evolution of a new tax code.
Increasingly, governments the world over are playing a proactive role as business partners and are dealing with taxpayers based on the norms of commercial awareness and openness, which, in turn, results in a positive response. An OECD study, published in late 2008, pointed out that historically relationships between large corporate taxpayers and tax authorities tend to be confrontational but in recent years both parties are seeing the benefits of a more cooperative and collaborative approach. Such an approach is even being extended to cover individual taxpayers such as the recent initiative of the Internal Revenue Service in the US to invite taxpayers to join a Taxpayer Advisory Panel and facilitate decision-making.
The revised discussion paper proposes significant changes in 11 critical areas of concern by suitably amending many of the earlier ambiguous and contentious provisions contained in the draft Direct Taxes Code (DTC).
Constructive suggestions received from taxpayers were carefully examined and suitable amendments were carried out to strike a proper balance. This approach is positive and has gone a long way in creating confidence, both in the domestic and international arena.
Tax laws which are drafted after taking into consideration practical realities offer more clarity and certainty. This results in reduced litigation and long-term stability, as the need for frequent amendments diminishes considerably. Overall, it leads to a better business environment, facilitates long-term decision-making and assured and timely tax revenues.
In particular, the decisions to continue the minimum alternate tax (MAT) levy on book profits instead of on gross assets; to introduce the international concept of “place of effective management” as a test of residency for foreign companies rather than “partial” management and control in India; and to water down the harsh General Anti Avoidance Provisions (GAAR) to mitigate the fear of harassment are progressive amendments.
Also, as against the possibility of the domestic tax law overriding the double taxation avoidance agreements (DTAAs) entered into by India, a taxpayer covered by a DTAA will be able to continue to adopt the domestic tax law or tax treaty provision whichever is more beneficial, barring certain exceptions. This is a positive measure.
One shudders to think of the uncertain environment that would have existed had suitable amendments not been carried out, as the earlier provisions created a fear of treaty override among the international community. Uncertainty about the tax environment hampers decision making, and trade with India could have taken a beating if such ambiguity were to continue.
While critics may wish to denounce the finance ministry’s move of introducing amendments, this measure is a sign of pragmatism. For instance, the revised discussion paper clarifies that existing SEZ-eligible units would continue with the exemption under the current law only for the unexpired period, post-introduction of a new tax code so as to protect existing investments that had been made on a certain tax benefit premise. By no means has the finance ministry gone back on its intention of widening the tax base. It has not extended the scope or period of profit-linked deductions.
Similarly, due consideration was given to constructive feedback that a MAT levy based on gross assets had no co-relation to income; it was based on the presumption that a company is expected to earn a minimum return on its assets and posed a strong disincentive for investments.
Over the years, there has been a debate over introducing controlled foreign corporation (CFC) rules as an anti-avoidance measure. In 2003, the Vijay Mathur Committee had suggested introduction of an underlying tax credit mechanism and CFC rules. However, the discussion paper does not make any mention of a proposed introduction of an underlying tax credit mechanism but indicates the introduction of a CFC regime which would tax passive income in the hands of the Indian shareholder even if the same were not distributed. Typically, developed tax regimes which have CFC rules also provide for participation exemption or underlying tax credit or carve out exceptions. The finance ministry should continue its collaborative approach and invite suggestions prior to its introduction.
By adopting a collaborative approach in drafting a new tax code, the finance ministry has ushered in transparency and taxpayers will reciprocate likewise, heralding a new beginning.
Views expressed are personal
