The Income Tax Act, 1961, contains the law relating to taxability of income in India. It is a legislation covering different aspects of taxability of income?namely, levying of income tax, computation of total income, exemption and deductions, power of the tax authorities, penal provisions and appellate procedures in case of disputes etcetera.
The Act is supported by the Income Tax Rules, 1962, which contains the procedural aspects, guidelines in respect of the working methodology of different sections of the Act. Since its introduction, the Act has undergone many changes. Every year, amendments are brought in through the Finance Act, deleting and modifying earlier provisions.
Besides being a tax code for levying income tax on different sources of income, the income tax law has also been used over the years as an important tool for focused economic development by providing incentives in the form of tax concessions and holidays to specific industries and regions of the country. Some notable examples are the concessions provided to businesses set up in special economic zones, export businesses and businesses set up in specified regions of the country.
The broad intent of various amendments brought in from time to time is primarily to align tax laws with the current economic situation and plug loopholes, if any. These amendments, along with a plethora of legal judgments that at times have conflicting views, have complicated the entire tax law, leading to varying interpretations of some provisions. Note that most of the tax-related litigation in India is on claims of exemptions and deductions.
All the above issues result in prolonged litigation at different levels?tax authorities, tax tribunals, high courts and the Supreme Court. Huge amounts of time, effort and money is invested in the litigation process at different levels. Even though it may be a theoretical argument, imagine the amount of resources that could be freed up if decisions on tax issues which generally take many years/decades are amicably resolved between the tax authorities and taxpayers. In the current tax scenario, however, this looks difficult.
The current amount of litigation requires serious thought on part of the legislature, tax administrators as well as taxpayers, and some innovative thinking to arrive at mutually acceptable business and tax solutions. There is sufficient evidence to support the view that whenever tax rates are reduced, the law is simplified and compliance procedures made more convenient, the relative percentage of both tax compliance and revenue collection has increased. This is borne out by experience. The lowering of tax rates in India in the liberalisation period has resulted in far better revenue collections.
If the proposed new tax code is simplified, not only by reducing the number of sections in the statute book but also by making it procedurally simple, limiting the number of exemptions/deductions to the minimum, it will surely help. Recall the famous 80:20 principle. Around 20% of the issues being litigated today probably consume 80% of the time and cost. Therefore, these key issues should be identified and resolved first. There should be an open debate on these issues between tax administrators and taxpayers through different forums, and amicable business and tax solutions arrived at.
Finally, India is at the threshold of becoming a true global player, and tax laws do play a vital role in any investment decision. Both international and domestic businesses would like to have certainty on the tax liability likely to be incurred on a business transaction. Having to wait for years together to know final outcomes tends to be a put-off. Turning India into a zone of good taxation could give a big impetus to economic growth.
?The author is director, KPMG India. These are his personal views
