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Every year the Hon’ble Finance
Minister interacts with representatives of industries. Representative of each
industry appeals to the Hon’ble Finance Minister to give concession in rate of
tax and incentive to their industry. However, we are not aware of any
representation from any industry to raise the tax base, simplify the tax law and
humanise the tax administration. My experience shows that it is the tax
professionals, who make the representation objectively without any favour or
fear. Earlier the Member Legislation of Central Board of Direct Taxes used to
visit Mumbai before the Finance Bill and after introduction of Finance Bill and
discuss with the professional organisations to ascertain their views on various
issues and provisions. We hope this tradition of interacting with voluntary
organisations will be resumed to common good. One of the duties of the tax
professionals is to make representation for better tax law and responsive
administration. The suggestions herein, therefore, are made in three parts and
deal with the issues that engage us viz.
(A) Conceptual (B) Specific
and (C) Increase of Tax Base.
(A) Conceptual
1. Bring Accountability in
Tax Administration
Some of the officers make
additions, in full knowledge that the additions will be deleted. Similarly,
some of the First Appellate Authorities confirm the additions knowing full
well that the additions will not be confirmed. Statistics show that 85% of the
additions made by the assessing officers are deleted by the Tribunal, which is
the final fact finding authority. This type of unproductive work can be
reduced to the minimum, if the concept of accountability is incorporated in
the tax administration following recommendation made by Tax Reform Committee
(Dr. Raja J. Chelliah) (1992) 197 ITR 257 (St).
2. Major Amendments in Tax
Laws should be made only once in five Years
The Finance Bill of each year
should lay down the rates of tax and urgent clarifications or simplification.
But major amendments should be made only once in five years. This will make
for stability in tax laws.
3. Independent Committee
to suggest amendments in Tax Laws
An independent Committee
consisting of representatives from profession, tax administration, tax-payers,
judiciary, etc. ongoing basis may scrutinise suggestions received from various
bodies. After examining in detail, they should suggest amendments which should
be made public and debated. Only thereafter the amendments be introduced. If
this process is followed we are sure 90% of litigation will be reduced
automatically.
4. Tax evaders and
corrupt officials must be ostracised and denied association with public
functions of Government and Professionals Department conducts survey, search
and seizure action against the alleged tax evaders. After a few days one finds
the alleged tax evader sharing the dais with ministers and top Government
officials. It is the duty of the ministers and Government officials to ensure
before sharing the dais with the persons to verify at least whether any search
action has been conducted against him by any of the revenue authorities. If
yes what is the result. Similarly, we find when an action is taken against a
corrupt official the paper post reporting of action against a corrupt
official. The media should be informed about the progress at regular intervals
by the investigating agency. CBDT should publish such information at least
once in a year and feed the information to various professional organizations
for publication in the journal.
5. Concept of promissory
estoppel
We are aware that the
principle of promissory estoppel is not applicable to Government. However,
considering political scenario, development of economy and inflow of
investment to India, at least in fiscal laws, the concept of promissory
estoppel should be introduced, which will bring stability in tax laws. No
amendment may be introduced retrospectively which affects the tax-payer’s
rights.
6. Arbitration in tax
matters (lok adalat)
The Government may consider
the proposal of constituting a committee consisting of representatives from
legal and accountancy profession and from the tax department of the rank of
Chief Commissioner of Income-tax for arbitration in tax matters. The assessee
may refer the matter to such committee within 30 days of receipt of the order
from the assessing officer and the committee should pass an order within six
months from the receipt of application. The order passed by such committee may
be made binding on both the parties. To begin with the matters like technical
defaults, refunds, etc. may be referred for resolution. The concept of Lok
Adalat may be introduced. The Government may consider the services of retired
members of Tribunal The proposal will benefit the tax payers as well as the
tax department.
7. Advance Ruling for
taxation – scope may be extended to Residents by giving power to Income Tax
Appellate Tribunal
One of the very important
provision in the Maharashtra VAT legislation is the provision for Advance
Rulings on the interpretation of any provision of the Act, Rules or
Notification in respect of a transaction proposed to be entered into by any
registered dealer even though any such question relating to the said provision
has not arisen in any proceedings. The Advance Ruling is given by the Bench
consisting of three members of the Sales Tax Tribunal, senior Practitioner
nominated by the President of the Tribunal and an officer of Sales Tax
Department not below the rank of Jt. Commissioner nominated by the
Commissioner of Sales Tax.
If similar provision is
introduced in the Income tax Act, Central Excise, Customs & Service Tax, for
all residents, litigation can be substantial reduced and tax payers will know
the tax liability. I am of the view that the Income tax Appellate Tribunal is
more competent to decide the issues relating to Advance Rulings. It is
therefore, suggested that in respect of residents the power of authority for
advance rulings may be given to the Income tax Appellate Tribunal.
8. Transparency in
legislation
We observe that there is no
concept of transparency in legislation. Before passing the legislation the
Government may send the draft legislation to the various bar associations for
their views. Once view is received the draft legislation can be introduced in
the form of Bill. However, it is found the Government first introduces the
bill and when criticism is received tries to amend the law.
9. Independent Legal
Department of tax administration
City of Mumbai contributes
40% of Direct Tax Revenue. However, it is very unfortunate that “major” tax
litigant i.e. Income-tax Department before the High Court of Bombay does not
have its own legal department. Each state should have a separate legal cell in
the Tax Department. The legal cell may be managed by the panel of lawyers in
co-ordination with the Chief Commissioner Judicial. Before filing an appeal
the legal Cell should consider the tax involved, issues involved and chances
of success. Only after panel of legal department is satisfied the appeal may
be directed to be filed. As soon as the appeal is filed the legal department
should be able to find out the issues involved and the tax effect. If it is a
very important issue affecting large number of matters the legal department
should make a request to group all the matters together. If it is of national
importance the legal department may request the court to take up the matter
for an early hearing. At Board level there has to be central legal Cell to
monitor the tax appeals pending before various High Courts and Apex Court.
Legal Cell of each state should send the list of cases filed before the High
Court and the issues involved and matters heard and disposed off. Once in a
year the Board should prepare the list of cases pending before the various
High Courts, Apex Court and publish the same for the information of tax
payers.
10. Research team to
monitor the tax matters before various High Courts
The City like Mumbai should
have a well equipped library to assist the counsel who represents the matters
before the Court. The Department may take assistance of young lawyers or law
students by paying honorarium to assist the counsel. They have to prepare the
note on issues involved, cases for and against. This may make for better
representation before the Court. This may help the tax department to build the
team of panel of lawyers for the Tax Department.
(B) Specific amendments
There are number of issues
which require specific amendments. I am of the view following specific
sections require immediate attention.
1. Housing project –
Notification of 80-IB(10)
In the City of Mumbai there
are innumerable slum rehabilitation projects which are carried out by various
undertakings engaged in development of housing projects. These projects are
approved by the Government of Maharashtra as slum Rehabilitation Project (SRA
Project). Through the Finance Act (No. 2) 2004, the legislature has removed
the restrictions of the project size by a proviso due to difficulties faced to
develop the project on an area of one acre within the slum, but such slum has
to be notified by the Board. It is very unfortunate that the Board has not
notified a single project. Even “Dharavi” which is the biggest slum of Asia,
has been not notified. The Board may be directed to notify at least Dharavi in
Mumbai for eligibility of claim under section 80-IB (10) though the size of
the plot may be less than one acre.
2. Disallowances of
expenses for failure to Deduct Tax at Source – s. 40(a)(IA)
By deducting the tax and
depositing the tax into the treasury of Government the assessee is working for
the Government. There may be number of genuine difficulties due to which the
assessee may not be in a position to make the payment on due date. In such a
situation disallowing the entire expenses may not be justified. For delay in
depositing the tax, the assessee may be made liable to interest. There may be
situation where there may be loss in the business in next year and the
deduction claimed is artificially disallowed one year the assessee may not
have any money to pay the tax. This artificial disallowance will make the
assessee bankrupt. The provision may be deleted or alternatively if the tax
deducted is paid before filing the return the deduction may be allowed.
3. All orders to be made
appealable
At present section 246A
provides lists of specific orders that are appealable. This creates plethora
of litigation only on the issue whether a particular order is appealable or
not. Making all orders appealable would simplify the law and generate
confidence in the tax payers that they have a legal recourse available to
challenge any order.
4. Appeal to tribunal
At present the assessee can
appeal against the order under section 263 and refusal of registration under
section 12A of the Income Tax Act by the Commissioner of Income Tax. There are
number of other orders passed by the Commissioner for which no appeal is
provided. The only remedy available with the assessee is to approach the High
Court in its writ jurisdiction, which is very costly and time consuming. A
simple amendment in the Income Tax Act may be made by stating that all orders
of Commissioner of Income Tax are made appealable to Tribunal. Some of the
orders which can be considered are:-
(a) Order under section 264
(b) Order under section 273A
(c) Not staying the recovery of tax when appeal is pending before first
Appellate Authority.
(d) Issue of notice under section 148.
(e) Order under section 179.
Lot of litigation arises on
account of reopening of assessment. All orders of jurisdiction challenging the
reopening may be made appealable to the Tribunal, which will save substantial
time of the High Court. To decide the issues relating to above matters, the
facts have to be looked in to. The Income Tax Appellate Tribunal being final
fact finding authority under the direct taxes is eminently qualified to first
determine the issues of fact and thereafter the aggrieved party may file an
appeal before the High Court on question of law.
5. Deemed speculation – S.
73
Section 73 of the Income-tax
Act deals with deemed speculation. If any company deriving business income
incurs losses on purchase and sale of shares the resultant loss would be a
speculative loss. Next year the company may have profit in share dealing when
there is profit the income will be assessable as business income. Speculation
loss can be set off only against speculation profit; this leaves an unbalanced
situation for companies whose main objective is to deal in shares. These
companies may have to pay the taxes year after year simply because carried
forward losses are deemed speculation. It is suggested that the explanation of
section for deemed speculation may be deleted or may be modified to exclude
companies primarily incorporated or otherwise dealing in shares and stocks of
those companies that are members of stock exchange.
(C) Raise the tax base
1. Taxation of
Agricultural Income
Federation had made a
representation to the Kelkar Committee to tax the agricultural income from
cash crops above certain reasonable limit. Due to constitutional prohibition
if it is not possible to levy tax on agricultural income, in the return
specific details may be furnished of agricultural income or holding of
agricultural land. All the cases where the assessee having agricultural income
of Rs 5 lakhs and above may be asked to file returns which will enable the
department to find out whether the income shown is agricultural or income from
any undisclosed source. The non cash crop production in our country is
reducing year after year in view of the land which was used for paddy
cultivation is now being used for cultivation of rubber, coffee, cashew, sugar
cane, etc. This is a dangerous situation for the country. We may have to
import food grains soon. It is therefore very essential to bring legislation
wherein the production of basic necessities of life like paddy, wheat,
vegetable, etc., may be fully exempt from direct taxes and cash crops may be
made taxable after certain limits.
2. Encouragement to make
payment by cards
In the city like Mumbai, if
you are paying by cash some of the shop keepers allow discount, however, if
one pays by card there will not be any discount. To encourage the payment
through banking channels and by use of cards, it is suggested that the tax
department should not ask the assessee to produce the party for verification.
Where as if the payment is received by cash the burden of producing the
purchaser is with the assessee. I am of the opinion that this will encourage
to bring more assessees under tax net.
3. Culture of tax service
Approach of tax officials
must be changed from tax collector to tax service. If tax officials change
their attitude towards assessees and guide them and advise them to pay the
taxes without bothering about technicalities I am of the opinion that many
assessees may come forward and pay the taxes regularly. Chief Commissioner
should call the assessees who are filing the returns regularly and paying the
taxes to discuss the difficulties, if any, faced by them and try to solve the
difficulties. If culture of tax service is introduced, the tax payer will
react very positively and pay the taxes voluntarily without any motive to
evade the tax.
We hope at least few of our
suggestions may be looked in to, while framing tax policy.
Dr. K. Shivaram
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