Decoding the matrix

Keeping its promise of a new and simplified tax code to its citizens, the UPA government unveiled the draft Direct Taxes Code on August 12, 2009.

The government has shown its efforts in phasing out the four-and-a-half-decade old Income Tax Act of 1961 with a new and ‘taxpayer friendly’ Code. The Code is designed to provide stability to the tax regime and is based on the accepted principles of taxation and best international practices.

Dispute Resolution Panel
In this modern world, mediation and the Alternative Dispute Resolution (ADR) System are the key words to avoid protracted litigation. With a view to align itself with the best international ADR practices, the government has introduced the concept of the Dispute Resolution Panel (DRP) in the Finance Bill 2009. Taking a step further in this direction, the government has incorporated the DRP as a part of the Code and also extended its application to domestic assessments.

Returns and assessment procedures: The Code introduces a new scheme for selection of returns for scrutiny assessment in the guise of a “Risk Management Strategy” (RMS) to be formulated by the Central Board of Direct Taxes (CBDT).

To enforce compliance from taxpayers who do not voluntarily file tax returns, the government has introduced the concept of issuance of notices to stop-filers and non filers. The Code has introduced the scheme for taxation of unincorporated bodies, that is, partnership firm, association of persons etc. Also the due dates for filing of returns have been set as June 30 for non-corporate and non-business tax payers and August 31 for others.

The power of rectification in an order of any mistake apparent from the record have been curtailed to two years.

To further ensure that there is no escapement of income from tax net, the reassessment notice period has been extended from the present 4/6 years to 7 years.

Tax deducted at source: The government has reiterated its intention of widening the tax base by making it mandatory for the deductees to quote PAN. Any default would attract the higher of effective tax rate or at the rate of 20 per cent.

The government has also done away with requirements of obtaining certificate for lower withholding of taxes.

Appeal, revision and penal provisions: The Code proposes that against an order of the tribunal, an appeal shall lie to the National Tax Tribunal.

The power of revision by the commissioner shall not extend to matters pending in appeal before the CIT(A). Interestingly, there is an anomaly in providing the time limitation for revision between the discussion paper (six months from the date of assessment order) and the tax code (two years). Further, no appeal has been provided against the order of revision. Such a provision may increase the litigation as an assessee may resort to writ jurisdiction where no alternative remedy is available.

To tackle the errant taxpayers, penalty and prosecution provisions have been given greater thrust in the Code. The Code provides that penalty shall be imposed for wilful under-reporting of tax base thus introducing the concept of mens rea. Further, no income-tax authority would have the power to waive the penalty imposed. The Code also proposes to separate penalty and prosecution proceedings from each other. The maximum penalty has been capped at 200 per cent of the tax payable vis-à-vis 300 per cent in the current legislation.

To conclude, law is nothing but a reflection of society. The radical changes proposed in the Code reflect India’s growth story on the world map. However, as always, good intentions have to be backed by better implementation.

Sanjiv Chaudhary Executive Director (Tax & Regulatory Practice), PwC