Successive finance ministers have made public announcements on the need for a non-adversarial tax regime without being able to actually bring about a change. The fact that when prime minister Narendra Modi visited the US and met several MNC CEOs, concerns over India’s tax regime repeatedly came up shows the enormity of the issue. The prime minister acknowledged the issue as having a significant impact on foreign investments in the country. A circular, dated November 7, 2014, issued by the Central Board of Direct Taxes is the first public acknowledgment of the issue and needs to be viewed in this light.
First and foremost, the circular is indeed a very welcome acknowledgment and an important step in the right direction. Second, the circular suggests that it is a reiteration of circulars issued in the past and enjoins on the tax office the need to follow the earlier circulars “in letter and in spirit”. That indeed is the heart of the issue—the need is to recognise that the mere issue of circulars is not the solution; rather, the revenue needs to follow them in spirit and only then will we move on to a new regime where a taxpayer is respected for the contribution to the society and the nation rather than being viewed (as a starting point) as being a tax-evader. Lets see how far this circular goes, whether it achieves the desired results and what more needs to be done.
In many ways, the circular brings in a breath of fresh air. Take for example the recognition that appeals need not be filed as a routine before the courts unless there is a merit in doing so. That is stating the obvious. The fact of the matter is that matters are litigated right upto the Supreme Court purely because of the quantum involved. This clogs up the system. The representatives of the revenue are flooded with large number of matters, leaving them little time to focus on other key matters which have a revenue potential. The circular requires the tax office to examine the merits of the matter and file appeal only in deserving cases. The acknowledgment that, on examining the pending SLPs before the Supreme Court, it was found that the reference to the high court itself was not warranted as the matter was factual one (for which the ITAT is the final authority) is also refreshingly candid; the proposition of requiring a review by CCITs before an appeal is filed is welcome. Indeed, if a review was undertaken of the matters before the high courts, several of the appeals could be withdrawn right away as the issues in appeal were purely factual and did not involve any substantial question of law. Such a review is indeed necessary.
Similarly, the reiteration that Instruction no. 1914 of 1993 needs to be followed in the context of Recovery of Demand is very welcome. The consistent worry of the taxpayers has been that high pitched assessments are made and demands recovered pending disposal of appeals. Instruction no. 1914 provides safeguards in this regard. While the Instruction has been around, it has not been followed in the recent past. Implementation of the circular’s provisions will provide a welcome relief to the taxpayers.
Also, the other points in the circular, regarding timely disposal of grievances, etc are very welcome.
As has been noted by the CBDT, many of these safeguards have been around but have not been implemented in spirit. The question, therefore, is what hope do the tax payers have that the situation will be any different going forward? What more can be done to make the mindset of the Revenue change? Here are a few thoughts.
If the earlier circulars existed but were not followed in spirit, the tone at the top today will very likely make things different. The key issue, however, is accountability. There is a need to ensure that if high-pitched, frivolous assessments continue to be made and recoveries ordered based on these, the concerned officers are made accountable for their action. For this to happen, there is a need to ensure that the officers are not required to chase high ‘revenue targets’ in the first place. If the officers need to chase targets for collection which have no bearing with the income of the assessees in the first place, they will need to make high-pitched assessments. The entire approach needs to undergo a change here.
The one issue which the circular does not address is the changing stand of the revenue on settled matters. There are several situation where a stand taken by the taxpayers is accepted by the revenue for years and a contrary position taken by successor officers. This results in taxpayers being unable to project their post tax returns; an open position on taxes is what tax payers detest the most.
The next issue to consider is a generic issue which applies to all bureaucracy; when tax assessments are made (or decisions taken to allow/deny deductions or exemptions, or file appeals), these decisions are inherently subjective. The current proposition of auditing the revenue officials’ assessments can result in a defensive position being taken by the latter. The system here needs an overhaul.
We continue to have situations where there are no time-limits provided in the statute for disposal; for example, in the case of appeals by the Commissioner (Appeals) or passing of orders that give effect to appellate orders. We need to provide for statutory time-limits and ensure that these are adhered to.
Finally, there is a need for training of the revenue officials. The circular provides that summons for personal attendance should be issued only in ‘deserving’ cases. What constitutes a ‘deserving case’ has to be necessarily left to the tax officials. A training programme which provides for a change of mindset, from mistrust to healthy scepticism, is the need of the hour. An important aspect of the programme should be how to conduct assessments using industry data and analytics so that the tax-base is widened and broad-based rather that the revenue focusing on gathering more revenues from honest tax-payers.
The circular reflects a change of tone at the top. As always, the key is the implementation. A focused effort on implementation should go a long way in building trust between the taxpayers and the revenue. Implementation of some of the measures announced in the Budget earlier this year, such as the setting up of a committee to look at taxpayer issues, the regime of advance rulings for resident taxpayers, the transfer-pricing provisions, etc, will also assist the process.
By Dinesh Kanbar
The author is CEO, Dhruva Tax Advisors