The Finance Bill, 2016, ushers in an unparalleled effort to simplify and rationalise some of the cumbersome requirements in the existing direct tax regime. The thrust of these changes has been to provide relief to small taxpayers and to reduce tax disputes. These changes reflect the government’s intent to focus on easing the compliance burden. The government seems to have reached out for the low-hanging fruits—dispelling tax adventurism fears, creating an environment to push for bigger reforms in the long run, etc. This article highlights some of the proposed changes on the side of rationalisation and simplification of direct tax laws.
An important change relates to characterisation of investments as capital assets versus trading assets. While courts have laid down various tests to determine the nature of the investment, disputes on characterisation of investments have continued. The existing regime was particularly tough for small taxpayers who did not always have the in-depth tax regime awareness required to explain the true nature of the investment. As a much-needed measure of relief, the CBDT has clarified that if a taxpayer treats the income arising from the transfer of listed shares held for a period of more than 12 months as capital gain, this will not be disputed by the tax officer. It is a thoughtful attempt at reducing a lot of avoidable tax litigation and ideally, the government should extend this to unlisted securities as well, so that the underlying idea realises its full potential.
As an instrument of ease of doing business, the presumptive tax scheme (that is, taxation at a pre-determined flat rate, thereby avoiding taxman’s scrutiny and the need for substantiation of claims) has been very effective and popular among small businesses. In order to widen the scope of the scheme, the turnover limit has been increased from Rs 1 crore to Rs 2 crore, which would bring in large numbers of small businesses under the scheme. This scheme has also been extended to professionals with gross receipts up to Rs 50 lakh, with the pre-determined presumption of profits (being 50% of the gross receipts). These measures would relieve the taxpayers from the burden of maintaining detailed books of account and getting them audited. Also, this would reduce the compliance cost for small businesses and professionals with limited resources and bring certainty in taxation.
Delay in processing of refunds was a major concern, and a slew of changes have been proposed to make it faster and fairer. For instance, before issuing a notice for scrutiny which typically leads to delay in processing of tax refunds, the tax return has to be first summarily processed, which leads to tax refunds being granted upfront. In a move to promote accountability and fair treatment of taxpayers, the interest payable on delay in granting tax refunds has been increased from 6% to 9%.
To bring clarity, penalty provisions have also been rationalised. Penalty is now proposed for two categories of cases—under-reporting of income and misreporting of income. Unlike it is today, where the tax officer has complete discretion to levy penalty upto 300%, the proposed provision provides for a fixed penalty, being 50% of the tax for under-reporting, and 200% for misreporting.
To reduce the compliance burden for non-residents, certain categories of non-residents will be now not required to furnish PAN details. Today, a non-resident receiving any sum liable to tax withholding is required to furnish her PAN to the person deducting tax, failing which, the rate of withholding tax can be higher than the applicable rate. As the existing provision does not provide for any thresholds, even if a non-resident receives a single payment liable to withholding tax, she would be required to obtain PAN. This change makes doing business easier and should allay the fears of non-residents who saw PAN requirement as an indirect way of bringing them under the ambit of the Indian domestic tax laws.
However, a positive move that the industry had hoped for but did not receive was the deferment of the proposed Income Computation and Disclosure Standards (ICDS). As the Indian industry is already trying to find its balance in the midst of accounting changes in the Companies Act, 2013 and Ind-AS, adding another item would further increase their burden. Also, having multiple accounting methods (i.e., one for the books of account, as already required under company law, and other for tax purposes) would create confusion and increase the compliance burden. The government should consider deferring the implementation of ICDS.
This has been a landmark budget as far as rationalisation and simplification of the income tax laws is concerned. Through some of these changes, a sincere effort is being made to transform tax administration into a tool for facilitating business. Apart from the measures described above, changes like enabling a taxpayer to have provisional attachment of her property revoked upon furnishing of a bank guarantee, and granting of stay of demand once the taxpayer pays 15% of the disputed tax will help check the adversarial nature of tax administration.
A critical reason behind the government’s successful initiative in introducing such simple yet creative proposals has been the ongoing efforts made by it to have a constant dialogue with all the stakeholders and to set up committees with clear and focused mandate like the Justice Easwar committee on income tax simplification. The number of proposals of the committee that were accepted by the government reflects a commitment towards rationalising the tax regime.
Written by : Adiya Singh Chandel. The author is with AZB & Partners