India needs a modern tax system, not a moth-eaten extortive one we have today

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Published: March 13, 2020 3:01 AM

The disputed tax amount under ‘income other than corporation tax’ is about seven times the undisputed tax amount at the end of FY19.

modern tax system, Receipts Budget 2020-21, corporation tax, CBDT Central Action Plan, Vivad se Vishwas scheme, corporation tax, CBDTOne of the responsibilities of HM Treasury, the UK government’s economic and finance ministry, is strategic oversight of the UK tax system including direct, indirect, business, property, personal tax and corporation tax.

By  TV Mohandas Pai & S Krishnan

The trust deficit between taxpayers and the tax administration is widening, as is reflected in the amount of income tax under dispute and litigation. According to Receipts Budget 2020-21, the total income tax under dispute has increased by 29% in one year, to over Rs 8 lakh crore at the end of reporting year 2018-19. Disputed taxes on ‘income other than corporation tax’ have increased by over 77% in one year, to about Rs 4 lakh crore.

The disputed tax amount under ‘income other than corporation tax’ is about seven times the undisputed tax amount at the end of FY19. More than 50% of outstanding disputes have come up in the last two years. The ratio of disputed to undisputed corporation tax at the end of reporting year 2018-19 has reduced to 4.9 times, compared to 5.7 times at the end of 2017-18. According to the annual CBDT Central Action Plan 2019-20, 3.41 lakh appeals were pending with CsIT (Appeals) as of March 2019, and the demand involved was Rs 5.71 lakh crore. In December 2019, CBDT wrote to all Principal CCITs highlighting that only 24% of appeals pending for more than five years, and 20% of appeals pending for three years and more, were disposed of till the end of November 2019. CBDT directed CsIT(A) to fully dispose of pending appeals of more five years as on April 2019 by March 31, 2020. We have reached this state in the face of the BJP’s promise to provide a non-adversarial and conducive tax environment, and overhaul the dispute resolution mechanisms, which is currently repulsive for honest taxpayers.

The government introduced the ‘Vivad se Vishwas’ scheme in February 2020 for dispute resolution of pending income tax litigation. The scheme provides for a complete waiver of interest, penalty and prosecution upon payment of the disputed tax amount in full before March 31, 2020. It does not provide any reduction in payment of disputed tax. The 2018 Economic Survey states the Income Tax Department has initiated 88% of direct tax litigation at ITATs and the Supreme Court, and 83% of litigation pending at the high courts. The success rate of the department for both direct and indirect tax litigation at all levels is under 30%. The 2017 CAG report states that the department unambiguously loses 65% of its cases. With this track record, one can guess on the number of litigants who would take up the ‘Vivad se Vishwas’ scheme.

CBDT has issued an office memorandum urging its field officers to make efforts in the right earnest for the success of this scheme, and the performance of officers with respect to this scheme will be an important factor in determining their future postings. The government is reported to have set a collection target of Rs 2 lakh crore by March 31. Taxpayers in dispute may be forced to settle cases under this scheme, further widening the trust deficit between the government and taxpayers.

Tax officers in India have to meet the high collection targets set by the Ministry of Finance (MoF). They can either collect them from a few honest taxpayers, or increase the taxpayer base. They choose the former easier option. This often pushes them to needlessly pursue appeals at higher levels, regardless of the outcome since there is no penalty on the I-T department and its officers. In many countries, there are consequences when tax officials are unable to defend their assessments in independent courts. As an accountability measure, the win/loss ratio of the department is tracked. The officer conducting the initial assessment, the officer recommending appeal after initial loss, and every officer in between is held accountable for each decision made. In India, there is no concept of win/loss ratio as a win or a loss doesn’t matter to income tax officers. Lack of separation of powers between tax policy and tax administration works in favour of tax officers in India.

Most countries have separate departments for tax policy formulation and tax administration. A separate directorate in the MoF or the Treasury would advise on policy and designing of new tax legislation. The tax administration would only be responsible for implementing tax policy. The tax administration deals with the current tax system, while the policymaking body deals with the future. Interaction between these two agencies would ensure a proper balance between legislation and its successive implementation.

According to the IMF, a Tax Policy Unit (TPU) generally encompasses four key functions: (1) guide general tax design and associated public consultations; (2) perform revenue and economic impact analyses; (3) initiate, participate and oversee manifestation of policy content during legal drafting processes; and (4) contribute to international tax obligations by, among other things, supporting the country team that is negotiating tax treaties with economic impact analysis. TPU plays a leading role in explaining in a non-politicised way, the economic rationale and intent behind tax policy changes and tax legislation. However, it is mainly the revenue administration that drafts interpretation notes that provide taxpayers and revenue administration officials with guidance and direction in applying the existing tax codes and regulations.

In the US, the Office of Tax Policy in the Department of the Treasury is responsible for developing and implementing tax policies and programmes; establishing policy criteria reflected in regulations and rulings and guiding their preparation with the Internal Revenue Service (IRS); negotiating tax treaties for the US and representing the US in meetings and work of multilateral organisations dealing with tax policy matters; and providing economic and legal policy analysis for domestic and international tax policy decisions. IRS is responsible for determination, assessment and collection of internal revenue in the US.

One of the responsibilities of HM Treasury, the UK government’s economic and finance ministry, is strategic oversight of the UK tax system including direct, indirect, business, property, personal tax and corporation tax. HM Revenue and Customs (HMRC), the tax authority of the UK government, is responsible for collecting taxes, paying child benefits, protecting UK borders against illegal activity, and enforcing the payment of minimum wage by employers.

A committee headed by Vijay Kelkar in its report ‘MoF for the 21st Century’ (issued in September 2004) observed, “Under the current organisational structure, the tax policy units are an integral part of the tax administration. This often results in conflicts of interest and distorted policy initiatives. In the modern view of organising public administration, the role definition of MoF should clearly be about policy formulation. Implementation work should be done through external, autonomous agencies. Appeal mechanisms (such as tribunals) should be separate from these implementation agencies, and should be placed under the Ministry of law.” The major strand of reform is the separation of the traditional line departments (income tax, indirect tax and customs) from the MoF, and granting them the legal status of semi-autonomous revenue authorities. The worldwide trend towards semi-autonomous tax authorities has gained momentum, as more and more countries adopt this organisational design. The Kelkar committee recommended the creation of a new Tax Policy Division in the MoF, responsible for development and evaluation of central government tax policies and legislation. The actual collection of taxes and interpretation of tax law would be the responsibility of CBDT and CBIC, completely semi-autonomous institutions under the MoF.

Based on TARC recommendations, the government in September 2016 set up a Tax Policy Research Unit (TPRU) and Tax Policy Council to bring consistency, multidisciplinary inputs, and coherence in tax policy. TPRU, a multidisciplinary body, will (1) carry out studies on various topics of fiscal and tax policies referred to it by CBDT and CBIC and will provide independent analysis on such topics; (2) prepare and disseminate policy papers and background papers on various tax policy issues; (3) assist Tax Policy Council chaired by the FM in taking appropriate tax policy decisions; and (4) liaise with State Commercial Tax Departments. TPRU is required to prepare for every tax proposal an analysis covering the legislative intent behind the proposal, expected increase or decrease in tax collection through the proposal, and the likely economic impact (positive or negative) through the proposal. A Tax Policy Council under the FM with nine other members was constituted to help the government in identifying key policy decisions for taxation. It would evaluate all the research findings from TPRU and suggest broad policy measures for taxation. Studies conducted by TPRU on fiscal and tax policies over the past three years are not available in public domain. India needs to urgently demarcate the two with tax policy exclusively under the MoF to avoid conflict of interest associated with bad and conflict-ridden tax design. India needs a modern tax system, not a moth-eaten extortive tax system we have today.

Pai is chairman, Aarin Capital Partners; Krishnan is a tax consultant

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