Direct tax compliance set to be made easier in upcoming Budget

Budget may resolve issues related to administration

Union Finance Minister Nirmala Sitharaman may announce further direct tax administration reforms in the upcoming Budget to make it easier for individuals and businesses to comply with tax laws, government sources said.

The current practice of different interpretations of tax laws by tax officers are leading to tax disputes and often result in revenue loss for the exchequer. The government's direct tax-GDP ratio has been hovering over 5-6 per cent in recent years. The ratio further declined to 3.7 per cent in the first half of the current financial year, but is expected to improve a bit for the entire year.

The government had already launched the faceless assessment of income tax returns in August last year. However, contentious issues still remain, making it cumbersome for taxpayers to abide by tax laws, experts said.

A source said: "Prime Minister Narendra Modi has already expanded the faceless assessment scheme in direct taxes to all-India level. Faceless appeal has also been put in place. However, some issues related to the tax administration side remain and these would be addressed in the Budget."

According to tax experts, the biggest lacuna in the current system is that tax officials interpret tax laws and rules differently and there is no certainty in that respect.

Former Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan said tax certainty is a key area that needs to be handled effectively.

"We have tried to manage litigation through various schemes like Vivad Se Vishwas, but a far better way to do it is to prevent litigation from happening. There is a need for a mediation mechanism, which should be non-binding and non-mandatory, in nature, and where the taxpayer can opt-in or opt-out anytime before tax is finally assessed. This will be of great help to businesses,” said Ranjan, who also chaired the direct tax task force that submitted the report to the finance minister in 2019.

The yet-to-be-released report is believed to have detailed such a mediation mechanism, which will have outside experts to give an impartial view.

“Mediators do not decide on issues, but only bring the two sides together. There are many disputes where taxpayers or tax officers are unnecessarily aggressive,” he said.

Ranjan said tax certainty is one of the major themes globally, including matters concerning digitisation of the economy. “Many things that happened in the recent past in India have not inspired confidence. For example, the appeal filed in the Vodafone case, though probably justified from the policy standpoint, is being viewed as reluctance on part of the government to publicly denounce retrospective taxation and let matters lie," he said.

Also, expanding the scope of equalisation levy on e-commerce transactions was not even in the previous Budget and no clarification was issued in that regard. "So, there is a lot of uncertainty now,” Ranjan said.

He said to increase certainty, “we need to nip litigation in the bud, and also assure investors that India has a stable tax policy and there are not going to be frequent changes in every six months".

Amit Maheshwari, partner, AKM Global, said an assessment by the income tax department should be risk-based. For instance, the department does an assessment of every transfer pricing transaction above Rs 15 crore. "It should be based on risks. Assessment should be made in those sectors which are riskier than others from the point of view of tax evasion, say real estate," he said.

This will result in the involvement of fewer officials and recovery will also better, Maheshwari argued.

He said there should also be the accountability of tax officers in terms of assessment results.

An expert cited an instance when he as a tax officer why he was raising an additional demand of Rs 100 crore in one of the cases. The tax officer replied that he had to raise some demand and finally agreed on Rs 3 crore, the expert said.

This kind of behaviour, the expert said, “does not stand the test of law in the court”. In fact, the counsel of the tax department often asks officers that why had raised the demand and argue it would not be upheld by the Income Tax Appellate Tribunal (ITAT), the expert said.

 The same holds true of additions made during searches. A report by the Comptroller and Auditor General, presented in the previous session of Parliament, found that an undisclosed income of Rs 19,108.30 crore unearthed during searches did not sustain at the appellate stage in 2018-19.  

Neeru Ahuja, partner at Deloitte, said: "We need more capacity building, training, and other tax administration reforms to make our tax processes and services faster and easier to access."

Similarly, the system needs efficient and faster services in tax litigation, especially fora like the authority for advance ruling (AAR), she said.

Ranjan said that the advance ruling, and advance pricing agreement mechanisms must be strengthened by increasing manpower. “There is a huge backlog of applications at the moment. If retired Supreme Court or High Court judges don't want to become members of the AAR, there must be a reason. The government should change the terms of service, or make it attractive for retired judges,” he explained.

The Supreme Court recently recommended to the Centre make the advance ruling system in direct taxes effective and comprehensive.

The apex court in its observation in the National Cooperative Development Corporation vs Income Tax Department case had cited a Deloitte report to observe that an increasing number of applications are pending before the AAR due to a low disposal rate and, contrary to the statutory requirement for a ruling to be given within six months, the average time taken is said to be nearly four years.

 "In view of the time taken, the very purpose of the AAR is defeated, due to which the mechanism is being used infrequently as is evident from the ever-increasing load of tax-related litigation," the court had said.

 The Tax Reforms Committee, headed by Raja Chelliah, came out with three reports in 1991, 1992, and 1993 with several measures, such as reforming the personal taxation system by reducing marginal tax rates, reduction in corporate tax rates, and reducing the cost of imported inputs.

 Years later, the government set up the Tax Administration Reform Commission (TARC) under the chairmanship of Parthasarathi Shome. It submitted four reports on tax administrative reforms. According to an action taken report by the finance ministry, the TARC made 385 recommendations, of which 291 suggestions were related to the Central Board of Direct Taxes. Eighty-six of the 291 recommendations have been implemented; 176 have been under implementation and 29 were rejected.

Among the key suggestions not accepted by the government were the abolition of the post of revenue secretary and lateral entry of experts in key roles.