1. Income Tax returns (ITR) filing: Rights and obligations of taxpayers have to be balanced; how this impacts compliance

Income Tax returns (ITR) filing: Rights and obligations of taxpayers have to be balanced; how this impacts compliance

Low tax compliance is a matter of serious concern in developing countries, limiting the capacity of their governments to raise revenues for developmental purposes.

By: | Updated: November 1, 2017 10:16 AM
Income Tax, Income Tax returns, Income Tax returns filing, ITR, ITR filing, Rights and obligations of taxpayers, tax administrations, low taxpayer base Low tax compliance is a matter of serious concern in developing countries, limiting the capacity of their governments to raise revenues for developmental purposes.

Low tax compliance is a matter of serious concern in developing countries, limiting the capacity of their governments to raise revenues for developmental purposes. Ensuring higher tax compliance has been, and continues to be, one of the key objectives of the tax administrations, and to achieve that they usually employ detailed enforcement mechanisms.

Low taxpayer base

What is the reason for low taxpayer base in India (around 3% of the population files income tax return)? What has the government done to address this? Are we moving in the right direction or are we over-administering? Failure to pay the right amount of tax creates a burden for honest taxpayers and a low tax base creates a strain on the government’s resources. The government has embarked on a series of measures to create a digital ecosystem to close the gap between the amount of tax to be collected in theory with how much is actually collected. Steps have been taken to achieve the goal of maximum governance by making tax compliance laws more user-friendly and transparent and eventually we hope to have a wider tax base.

Self-assessment & voluntary compliance

India is beginning to recognise the importance of self-assessment and voluntary compliance, and tax enforcement is beginning to be based on risk identification and its management. We moved on that path in a very cautious manner, by setting up a risk-based audit system, called a computer-aided scrutiny system (CASS). But what is of note is that despite setting up CASS some years ago, manual selection of tax audits has not stopped. News on introduction of Direct Taxes Code to overhaul the income-tax structure, since the existing tax laws are over 50 years old and do not fit in with today’s environment and economic situation, doesn’t go down well with the taxpayers. A new direct tax law may further increase tax litigations, given the fact that the provisions and language of the new law would be different, and the new law may unsettle the settled legal issues.

A sense of unrest prevails in the minds of taxpayers, owing to the burden of understanding the new tax law, when they are still struggling to cope with the new Companies Law and GST Law. Significant amount of time and effort of taxpayers goes into adapting to these many complex changes in laws, diverting their focus from doing business. Are we really moving towards ease of doing business? Recently, we have seen various tax rulings that overrule the position of law settled by past judgments in favour of the assessee. The annual tax amendment ritual of our government brings about a change in the law overruling past decisions favouring taxpayers. Unsettling the settled positions brings uncertainty and fear looms that tax positions adopted today may not stand the test tomorrow.

Tax laws should be simple

Tax being a cost should be certain and simple, to let the taxpayer concentrate on earning income rather than just managing the tax risks. Tax uncertainty can act as a drag on innovation, growth and profitability. It is imperative that certainty, fairness and stability continue to serve as guiding principles and not the amount of tax that can be collected. It is necessary to guarantee and enforce internationally recognised taxpayer rights and safeguards to counter excessive discretion and corruption.

Improvement in taxpayers’ service, enhanced use of information and communication technology and exchange of information with other agencies, are some of the measures taken by the government which shall result in a higher degree of trust between the tax collector and taxpayer. India is witnessing a shift from enforcement-based strategies to service-based strategies in tax administration. With a proper understanding and implementation of these initiatives, we can hope to have a fair balance between the rights and obligations of taxpayers.

The writer is executive director, Nangia & Co LLP

  1. A
    Apte
    Nov 1, 2017 at 9:45 am
    1. Yes, view that tax laws have to be simplified is fine. However, issue is not as simple as that. There are very intelligent people in our society who provide their service to taxpayers - a kind of service which may actually lead to evasion of tax. 2. Information provided by taxpayers has to be used for analysis in a methodical manner. I wonder whether this happens. I will give an example. I understand that if income tax is deducted at source (TDS) from an individual and if he/she does not file Income Tax Return (ITR), ITD may not take any action. This is not a correct response as TDS may be used as a tool to avoid payment of higher amount of income tax. 3. I believe that coordination between different tax departments of the Union Finance Ministry and of State governments has to be increased. With good coordination it would be possible to widen taxpayers’ base. 4. A new income tax law provision for imposing penalty for delayed filing of ITR even if tax liability is NIL is unfair.
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