The people of India have decisively voted for a change”, was FM Jaitley’s opening statement in his maiden Budget speech, in 2014. The ‘change’ is indeed echoed by his government transforming the economic and tax policies, with the reforms boosting the confidence of domestic and international investors. The government with a massive mandate has had an uphill task to manage expectation of investors and business community and deliver on its promise of providing a non-adversarial tax regime, simplification of tax rules, tax reforms, corruption free economy, improve India’s ranking on ease of doing business and the list goes on.
In parallel, the crackdown on tax evaders has featured on top of the government’s agenda. Key steps initiated by the government include formation of SIT on black money, passage of Black Money (offshore assets) Bill, notification of Benami Transactions (Prohibition) Act, income disclosure scheme of 2016, successful negotiation of tax treaties with Cyprus, Singapore and Mauritius (viewed as avenues for tax evasion), demonetisation of high-value currency notes, commitment towards G-20 BEPS initiative, electoral reforms, etc—all of these signal a paradigm shift in purging ill-gotten wealth by raising the punitive costs and consequences of malfeasance.
Budget 2017 introduced a series of amendments in the Income-Tax Act, expanding the enforcement powers of the taxman. The most noteworthy of these are the amendments to sections 132 and 132A of the I-T Act, which govern search and seizure operations. Under the existing provisions, the tax administration—based on ‘reason to believe’ or ‘reason to suspect’—is authorised to carry out search and seizure. The recording of ‘reasons to believe’ and ‘reasons to suspect’ and the requirement to disclose such reasons to the taxpayers has been a contentious issue, with multiplicity of judicial precedents over the years—this has created further ambiguity on disclosure of such reasons. The Supreme Court in 2015, in the case of Spacewood Furnishers, ruled that in order to bar a taxpayer from gaining ‘undue advantage’, the ‘reasons for belief’ would not be communicated to the taxpayer (subject to such search) where the authorisation for search has been granted.
The Court further stated that the requisite material may have to be disclosed to the taxpayer after the completion of search and seizure, at the stage of commencement of the assessment proceedings. This was to ensure that the taxpayer rights are protected and give him an opportunity to challenge the search before the appellate authorities.
Budget 2017 seeks to put to rest all controversies by affirming the apex court judgment and has introduced an Explanation to section 132(1) and 132(1A) to provide that the ‘reason to believe’ or ‘reason to suspect’ shall not be disclosed to any person or any authority or the Appellate Tribunal. The said amendments impact taxpayer rights and do away with accountability of tax officials conducting raids; however, these have been justified by citing reasons of “confidentiality and sensitivity” and saying that such reasons would be disclosed before the courts . These amendments have been given retrospective applicability, thereby validating past actions of the search officials.
Another noteworthy amendment is the power conferred on the investigating officials to provisionally attach taxpayers’ assets during a search, and hold on to it for six months without completion of assessment, in pursuance to the search. The amendment seeks to have been introduced under a presumption that the ‘raided’ taxpayers are guilty, unless proven otherwise. Understandably, the proposed amendment would preclude a raided taxpayer from disposing off assets/ property, an overriding concern for the government. However, this provision can cause undue hardships to taxpayers. Similarly, another amendment introduced to section 153A of the I-T Act, allows tax authorities to reopen assessments for previous 10 years if any search leads them to undisclosed deposits or property of over R5 million. The limitation period was previously six years.
Other amendments proposed in the Budget that enhance the powers of tax authorities include:
*extending the powers to call for information to tax authorities below the Commissioner level;
*widening the scope of ‘survey’ to include places where activities for charitable purposes are undertaken, which was earlier restricted to place of business or profession;
*empowering the Central Board of Direct Taxes to make a scheme for centralised issuance of notice calling for information, etc.
The Explanatory Memorandum to the Finance Bill, 2017 classify these changes as ‘rationalisation measures’, aimed at protecting the interest of revenue, safeguarding recovery in search cases and removing ambiguities created by judicial pronouncements. True, the amendments proposed are made with a noble intent—to crack the whip on tax-evaders who take shelter under technical anomalies in the law and get away without paying any taxes. In the same breath, the amendments confer unbridled powers to officials, and have seemingly tipped the scales in favour of the law enforcement agencies.
On the flip-side, such unfettered powers without fastening accountability has raised concerns in business and investor community. Such fears are not unfounded given the patchy record of tax administration in enforcement of law. If the government, in its wisdom, pushes for passage of the Bill, it must now ensure that such sweeping powers are tempered with more judicious use of search and seizure operations, coupled with checks and balances such that taxpayer rights are protected.
The third report of the Tax Administration Reform Commission (TARC) suggested that search and seizure operations should be limited to cases where hardcore tax evasion is suspected. To ensure this, economic intelligence should be better developed and exchanged. Non-invasive surveys based on credible information and a technology-based tax collection system, which is non-intrusive, should be used to identify non-filers. This can be done effectively by concentrating on clusters of business units, especially in developed cities and new emerging cities and sectors known for the use of undocumented/cash transactions.
Taxpayers’ concerns can be addressed through effective implementation of the new provisions and ensuring that the provisions are not misused. An orderly system to ensure that the officers do not act on whim, unsubstantiated suspicion or rumours needs to be put into place. Measures such as implementation of a strict internal code for granting authorisation, administering a strict audit mechanism, releasing timely instructions, updating of search manuals, guidance on code of conduct for search officials, etc, can go a long way in ensuring that taxpayers are not harassed. These measures would restrict tax officials in exercising such powers judicially and also build a sense of accountability. The government, through such measures, needs to strike a balance in fulfilling its agenda of targeting exceptional cases of tax evasion and, at the same time, providing a non-adversarial tax regime to most taxpayers.
With inputs from Puneet Gupta. The author is managing partner, BMR Legal, Views are personal