1. Income Tax Act, 1961 Review: What a new tax code needs is patience, planning and pragmatism, says former CBDT chairman

Income Tax Act, 1961 Review: What a new tax code needs is patience, planning and pragmatism, says former CBDT chairman

There is an apparent need for re-writing the present Income Tax Act because it has become too cumbersome and complicated to administer.

Published: November 30, 2017 11:25 AM
  Income Tax Act 1961 Review, new tax code, income tax act, CBDT, Task Force, NDA government, Wanchoo Committee Drafting of legislation to bring about new tax laws is a solemn, daunting and difficult exercise and cannot be achieved in an adhoc and hurried manner.

By T N Pandey

It seems to have become a pastime with governments to appoint Tax Commissions and Committees to tinker with the income tax law of the country. The NDA government is no exception to this practice. By an Office Order dated 22nd November, 2017, the CBDT has constituted a Task Force with Arvind Modi, Member (Legislation), CBDT, as Convener (the third one during the 3-and-a-half-year rule of the NDA) “….to review the existing Income Tax Act, 1961 and to draft a new Direct Tax Law in consonance with the economic needs of the country…”. The Task Force, besides the Convener, comprises of 5 other members, namely (i) G.C. Srivastava, ex-IRS, Advocate; (ii) Rajiv Mehani of Earnest & Young; (iii) Girish Ahuja, Chartered Accountant; (iv) Mukesh Patel, Tax Lawyer, and (v) Mansi Kedia of ICRIER. Shri Arvind Subramanian, Economic Advisor for the GOI will be permanent invitee to the Task Force meetings. It has been constituted with the approval of the Finance Minister. The decision for constituting the Task Force needs appraisal from 4 angles, namely (i) Need; (ii) Constitution of the Task Force; (iii) Terms of reference; and (iv) Time-frame for accomplishing the task. These are examined in later paragraphs.

There is an apparent need for re-writing the present Income Tax Act because it has become too un-wieldly, cumbersome and complicated to administer because of changes made by annual Finance Acts and on the basis of suggestions made by more than a dozen Committees & Commissions in the past, inter-alia, to meet timely needs, which have got stuck up permanently in the I.T. Act. Further, though serially numbered, there are only 298 sections in the Act, the fact is that the coverage of the Act has been extended to nearly 800 sections by adding sections, such as 115JEE, 115TCA, etc. The PM also, in some of his addresses, stressed the need for replacing the over 50-year-old Act by a new Act. Hence, there is emergent need to re-write the Act. However, to make it simple, short and easily understandable, much needs to be said about the body that has been constituted to re-write the existing law of nearly 800 sections.

This is, perhaps, the first time in the income tax history of India that a tax reform body has been created without a head, i.e. Chairperson. Even the present government has not done so when it constituted Special Investigation Team (SIT) on the Supreme Court’s directions and Eshwaran Committee in the year 2015 to examine merely a few aspects relating to the I.T. Law. Rather, in the two cases, cited above, the concerned bodies have been overstaffed. The SIT is having Chairman & Vice-Chairman as its heads, who are retired judges of the Supreme Court (with pay and perks of sitting judges). SIT is assisted by a host of regulatory bodies like ED, DRI, Income Tax, etc. The Eshwaran Committee was headed by a retired judge of the High Court with 10 members to formulate recommendations only on 4 aspects of the I.T. Law. Then, why the Task Force for re-writing a new Direct Taxes Law for the country has been constituted without a Chairperson, with only 7 members in it? This shows the non-seriousness with which this body has been constituted, without giving proper thought to its constitution.

About the terms of reference, the less said the better. The past attempts for tax reforms have not succeeded because the Finance Ministry has not done the homework in framing the terms of reference in a well-thought out way. No terms of reference were formulated at all for DTC Codes 2009 & 2010 by Chidambaram. The result was that the exercise of bringing tax reforms in the form of new tax codes ended in a fiasco.

Not learning any lessons from the past, the terms of reference for the new Task Force have also been drafted in most general ways, leaving the initiative for changes to the Task Force instead of the government, having the controlling hand itself.

[a] The Task Force has been entrusted the work of drafting an appropriate legislation keeping in view:-

[i] The direct tax system prevalent in various countries

[ii] The international best practices

[iii] The economic needs of the country; and

[iv] Any other matter connected thereto.

These could be said to be highly unsatisfactory.

[b] Some immediate areas of concern, which need to be addressed, have not been mentioned at all in terms of reference. A few of these are:-

*About re-introducing tax on dividends

*Whether nuclear families need to be made unit of taxation

*Whether there should be progression in the taxation of companies

*Whether deductions for individual taxpayers to be focused on long-term needs like social security

*How simplicity and comprehensibility of both structure and content-making can be brought, to make the statute more user friendly

*Whether taxes like Wealth Tax & Estate Duty be re-introduced

There are a lot of other aspects that need mention, but space is a constraint.

The next issue is about the time-frame given for bringing about structural changes. It is absolutely impractical to perceive that new Direct Taxes Laws for the country can be drafted in 6 months’ time by a Task Force of 7 persons without a Chairperson. The SIT, appointed by the NDA Govt. itself, with skeleton terms of reference has not placed any report in public domain even after nearly 3 ½ years of its functioning. The Eshwaran Committee took nearly 12 months to give its final report on merely 4 aspects of the I.T. Law. A Task Force entrusted with the task of framing new Code for the country should have been given at least one year’s time to start with. Extending time when six months are nearing will lead to fragmented working, which will not be conducive for preparing model tax laws for the country.

Drafting of legislation to bring about new tax laws is a solemn, daunting and difficult exercise and cannot be achieved in an adhoc and hurried manner. Preparing a new tax code needs patience, perception, planning, preparation, perspiration, penchant, precision and pragmatism in approach. The new law needs to possess qualities of simplicity, progressivity, stability with elasticity, efficiency, certainty, controllability, neutrality and acceptability by the taxpayers. All these cannot be possible with a Task Force of the nature approved by the FM in 6 months’ time. A practical view is needed. Hence, it is necessary that the corrective steps be taken right now and a full-fledged commission, headed by a Supreme Court Judge as in the case of Wanchoo Committee (which is best report so far on tax issues) with specific terms of reference, giving 12 to 18 months’ time, be appointed with the following as the members:-

[i] A retired President of the ITAT

[ii] A retired Law Secretary, well-versed in drafting of laws

[iii] A Chartered Accountant

[iv] A Tax Economist

[v] A Fiscal Expert; and

[vi] A Chief Commissioner of Income Tax as Member-cum-Secretary of the Commission.

Without adhering to such suggestions, the exercise, to be done by the Task Force, will be another futile exercise to nobody’s benefit.

(The author is Ex-Chairman, CBDT)

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