It is a fact that one of the most contentious income tax provisions ever, the 2012 retrospective tax amendments, would probably have never seen the light of the day if a thorough discussion on this would have taken place within the revenue department and also among the different economic ministries. Lack of co-ordination between the two tax departments, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC), and also deliberations of the finance ministry with other economic ministries, including commerce, has been a major problem in the formulation of tax policies for quite some time now. This is why, at times, and especially in the last few years, tax measures acted against the promotion of investment and better tax administration, harming revenue interest, too, in the ultimate run. The retrospective tax amendments are a living example of that, with the Vodafone and Cairn tax cases awaiting resolution, along with the R2.64-lakh-crore transfer-pricing additions to the MNCs’ income between FY06 and FY15 and the direct tax arrears surpassing the budgeted tax collection. This is why the Tax Administration Reform Commission (TARC) rightly pressed for a change in the handling of tax policy and related legislation pointing out that, “The tax administrations witnessed large tax revenues becoming uncollectible due to disputes emanating from tax demands that were of a protective nature, i.e., issued just to insure the tax officials against future liability”. At present, the tax proposals of even the two boards reach the finance minister’s table separately. The TARC suggested constitution of a Tax Council supported by a common Tax Policy and Analysis (TPA) wing to cater to the needs of both direct and indirect taxes having tax administrators, economists, and other specialists such as statisticians, tax law experts, operation research specialists and even social researchers.
So, the government’s decision to set up the Tax Policy Research Unit (TPRU) along with the Tax Policy Council (TPC) ahead of Budget FY17, though a delayed one—as it will be of any significant help only in Budget FY18—is a step in the right direction. The TPRU will carry-out studies on various topics of fiscal and tax policies referred to it by CBDT and CBEC and will provide independent analysis on such topics; prepare and disseminate policy papers and background papers on various tax policy issues; will assist the TPC chaired by FM in taking appropriate tax policy decisions and also liaison with State Commercial Tax Departments. Every proposal of the TPRU will have accompanying analysis covering the legislative intent behind the proposal, the policy objective, expected increase or decrease in tax collection through the proposal, and the likely economic impact (positive or negative). Headed by an officer of the Chief Commissioner level, alternatively from CBDT and CBEC, the TPRU will function under the revenue secretary. The TPC will have 9 members to assist the finance minister in taking tax decisions—the minister of state for finance, deputy chairman of NITI Aayog, minister of state for commerce and industry, finance secretary, economic affairs secretary, revenue secretary, commerce secretary, DIPP secretary and chief economic advisor. Whether these changes will finally culminate in a merger of the two tax boards and abolition of the post of revenue secretary, as suggested by the TARC, or not, remains to be seen. However, this is certainly a good beginning in improving the handling of tax policy issues.