The Taxation Laws (Second) Amendment Bill, 2016, recently passed by the Lok Sabha, raises a number of very serious concerns
The Taxation Laws (Second) Amendment Bill, 2016, recently passed by the Lok Sabha, raises a number of very serious concerns: One, the government has introduced punitive legislation at a time when middle classes and the poor are reeling under a shock and queuing up in long serpentine lines to withdraw their own hard earned money. Two, it is dangerous to vest so much discretion in the lower tax bureaucracy who may be prone to misuse it. Three, the I-T department does not really have the manpower to investigate 6.7 crore accounts of middle class Indians to see whether the deposits made into them–post demonetisation–are not disproportionate to the income of their owners.
The legislation was necessitated when the government noticed a lacuna in the I-T Act. Under sections 69A and 115BBE, a taxpayer could offer any unexplained deposit of cash as her current income, pay 30% tax on it and wash away all her sins of omission and commission. This was obviously not acceptable to the government; but in making it much more difficult for the tax evader to achieve this objective, it has used a blunt instrument which may impose huge pain on ordinary people.
The new law provides for an impractical amnesty scheme. Where a person accepts that any deposit made by her is unaccounted and makes a declaration to that effect, she will be required to pay income- tax at the rate of 30%, a surcharge of 10% and further penalty of 10%. Thus, out of every R100 which she declares, she will be left with Rs 50, out of which she will again be required to deposit another R25 in the Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), for a period of four years. During this lock-in period the deposited amount would be utilised for the benefit of the poor in schemes relating to irrigation, housing, toilets, infrastructure, primary education and primary health. If the return foregone at 10% is also taken into account, the taxpayer would at the end of the lock-in period have lost another R11.60. She would, thus, in all have paid R61.60 to the Government and locked up a fourth of her deposit (Rs 25 in the present case) for four years. Because it is so unattractive and unrealistic, this scheme will have few takers and may fail.
On the other hand, if a person does not avail this amnesty scheme, she can be asked to explain the source of the cash deposited by her in her bank account. If her assessing officer does not find her explanation satisfactory, she will out of a deposit of R100, have to pay a tax of R75 and a penalty of R10. In other words, she would retain only R15 out of the R100 which she deposited. We don’t want people to break the law, but this is virtually a throwback to the socialist era of the seventies when the marginal tax rate in the highest slab touched 97.75%. The Prime Minister has assured the nation that the government will not look at deposits made by small persons; nonetheless, the amendments to the law are draconian, and do not provide for any safeguards against misuse. Under Section 69A, the opinion formed by the assessing officer is critical; he decides, in the first instance, whether the explanation offered by the assessee is acceptable or not. The new law, instead of encouraging people to move into the white economy, will only discourage them.
How will an assessing officer (AO) go about his task? Income-tax proceedings are essentially civil in nature and issues of this kind are decided on the basis of balance of probabilities. An AO is expected to apply the test of ordinary prudence–namely, given the circumstances would an ordinary prudent person be able to conclude that the amount of cash deposited by the taxpayer is reasonable, having regard to her status and past declared income?
Laid down by the courts over the decades, this test appears to be fair and reasonable in binary situations, in which all prudent persons may come to the same conclusion. The difficulty is that we seldom come across black and white situations in real life. Real life is messy: as Nani Palkiwala once pointed out, we often find situations where the taxpayer cannot prove that she is speaking the truth, and the revenue cannot prove that her explanation is false. The revenue’s best case may be that the taxpayer’s explanation is unsubstantiated. In such circumstances the taxpayer’s contention is usually rejected; later when she litigates the matter she will get some benefit in appeal. Years, however, may pass; the litigation may be protracted and expensive; and this hardly constitutes justice.
The new law also raises two other issues: one relates to the dilemma faced by modern governments with regard to how much freedom they should grant officials in implementing legislation. Too much discretion, as in the present case, results in harassment or abuse of power–when, for example, the official, knowing fully well that ordinary people do not keep accounts, demands back-to-back proof before she allows relief. If officials approach the implementation of the new law with this mindset, they will undoubtedly be accused of corruption.
The other issue relates to the handling capacity of the department. The CAG’s Report on Direct Taxes (No 3 of 2016) indicates that in FY15 the department had 6,576 AOs who together completed 5,35,444 assessments. The current challenge will be to examine deposits amounting to more than R10 lakh crore. Most families comprising the Indian middle class, i.e., a population of 26.7 crore individuals would have deposited some amount or the other in their bank accounts. Assuming a family size of four individuals and one bank account per family, this would mean a perusal of at least 6.67 crore accounts–which is far beyond the current capacity of the department, if it follows its traditional time consuming approach to scrutinise assessments.
The department would, therefore, be well advised to do an ABC analysis and pick up only those cases where information is infallible and the benefit-to-cost ratio the highest. Advanced data analytics techniques may prove useful in the initial selection of cases. However, middle class Indians–both taxpayers and others–will face considerable harassment if, as recently reported, the department hires additional manpower to scrutinise the recent deposits in bank accounts. This is because in many cases these deposits may have no connection with tax evasion, and the additional manpower deployed is hardly likely to be conversant with I-T law.
It is tragic that this retrograde piece of legislation will in one stroke undo all the reforms–timely issue of refunds, reduction of interface between officials and taxpayers, induction of technology to ensure on line filing of returns and appeals etc.–that the department has introduced in recent times.
The author was chief commissioner of Income-tax and ombudsman to the Income-tax department, Mumbai.