By Aishwarya Bagri
Tax terrorism is a disease plaguing the nation since time immemorial. It implies extracting more tax revenues from the public than what is due. In a country where less than two percent of a 1.3 billion population pays income tax, such a malpractice seems extremely dangerous as it can further reduce the small number of taxpayers. Prime Minister Narendra Modi first coined the word during an interaction with the corporate body Federation of Indian Chambers of Commerce and Industry (FICCI). The saffron partys biggest mandate on the manifesto was putting an end to tax terrorism. However, the situation has just worsened. The corporation tax under dispute for a period between one and two years has increased by 44% to ?2.08 trillion in 2016-17 from ?1.44 trillion in 2014-2015. Even the income taxes under dispute have risen by 2.85 times over the same period.
Furthermore, the pendency rate of scrutiny assessments has been growing; from four percent in 2014-15 to 52 percent in 2015-2016 and to 56 percent in 2016-2017.
Understanding the causes
There are a lot of problems in both the structure and enforcement of Indian tax laws. For example, the Specific Anti- Avoidance Regulations and the General Anti-Avoidance Regulations are in tandem with tax rules worldwide. However, our taxmen seem to apply such regulations to even those who are not avoiding payment. This makes the honest taxpayer less willing to comply.
Authorities can issue demand notices even to people who have paid taxes over the years. According to Section 242 of the Income Tax 1961, it shall not be open to the assessee to question the correctness of any assessment or other matter decided which has become final and conclusive or ask for a review of the same and the assessee shall not be entitled to any relief on such claim except refund of tax wrongly paid or paid in excess. This provision implies that in the case of an advance tax, the payer cannot question the correctness of the assessment of the tax. Such provisions lead to immense exploitation and a rise in disputes. For instance, an article in the Bloomberg unravels an incident where the writer of the article came across a hassled entrepreneur. The tax authorities wanted to tax the share premium received on investments in the entrepreneurs startup as other income because the taxmans assessment of the startups fair market value was very less compared to the firms projections. Such mere foolishness leads to a complete devastation of a tiny enterprise.
The infamous case of Vodafone
The tax laws create impediments for MNCs and foreign investors as well, thus impacting Indias reputation in the world. A very popular case involving Vodafone Ltd. exemplifies Indias complicated tax machinery. In 2007, Vodafone acquired a stake in a joint venture between Essar Group and a foreign company, through a subsidiary. Vodafone thus started telecom operations in India. The Union of India slammed taxes worth ?2.5 billion on Vodafone over the acquisition of assets of an Indian company. Vodafone, however, refused to pay this huge amount as it claimed it had made purchases abroad (the Cayman Islands, a tax haven) and not in India. In January 2012, the Supreme Court passed a verdict in favour of Vodafone upholding its rationale over the tax authorities claim. To prevent foreign companies from evading taxes, the UPA government amended the Income Tax Act, 1961 retroactively. The tax authorities later charged Vodafone ?20,000 crore as taxes and penalties.
Whether Vodafone or the Indian government was right is not the point of discussion right now. Instead, there are two other important points to be made here. Firstly, India should be more aware of the loopholes in its policies that allow firms to evade taxes. Secondly, once the government is aware, it should not change laws retroactively since this impacts business organisations detrimentally and affects investor sentiment in the country. The case regarding the retrospective penalty is still in its second phase and the last Supreme Court hearing took place in December 2017. A tax dispute lasting over 10 years just reveals the magnitude of complications in Indias taxation structure.
Another cause contributing to the issue is the setting of unreasonably high revenue targets. A report by the Parthasarathy Shome Committee recommends that such illogical tax collection targets should not be laid down. For instance, it is futile to expect tax revenue to grow at 20 percent when the economy is growing at about 7 percent.
Thus, it is evident that there are numerous causes adding to the woes of the taxpayer, irrespective of his size or nationality. The government needs to address these issues individually as well as holistically.
Analysis of solutions offered
The BJP governments election manifesto read, the UPA government has unleashed tax terrorism and uncertainty, which not only creates anxiety among the business class and negatively impacts the investment climate, but also dents the image of the country. A staunch critic of the UPAs taxation policies, Finance Minister Arun Jaitley has been quoted saying that the government wont bring any change in tax laws which will have a retrospective effect and lead to the creation of a fresh liability. However, that hasnt stopped the government from going after Vodafone.
Although the data in the first paragraph of the article reveals that the government may not have lived up to its promise of eradicating tax terrorism completely, it has taken some policy measures.
The Goods and Services Tax, though the most complicated one in the world, is aimed at increasing the tax base and thus revenues. Also, it now seems that the teething problems are now fading as the economy is stabilising and GDP growth is rising.
An advance ruling is a measure for foreigners to obtain clarifications from the tax authorities on the proposed transaction. This ensures in effective tax planning and thus avoidance of costly and legal litigations. This facility has been advanced to Indian residents as well.
Way forward
India jumped up 30 ranks in the latest ease of doing business report, even after its poor reputation in tax laws. If we succeed at resolving the complicated knot of various tax laws, India would benefit immensely. Yet, that would not be enough. We need to make our taxmen realise that they are viewed as tax terrorists scavenging in business sentiment and petrifying the common man. They need to portray themselves as a tax army going hard on evaders and protecting and promoting the abiders.