Income-tax law: New layout, old provisions, but complexities remain

“The secret of change is to focus all of your energy not on fighting the old, but on building the new.” – Dan Millman

 

The debate to replace the extant 1961 Code has been around for over a decade, with the first serious attempt made by former finance minister, P Chidambaram, in 2009, when a working paper was released for public consultation. The stated intent of the new code was to make it concise, lucid, and easy to read in order to reduce disputes. Earlier this year, the Ministry of Finance opened its portal for public comments, eliciting suggestions in four categories: 

• Simplification of language
• Litigation reduction
• Compliance reduction, and
• Redundant/obsolete provisions 

Though not officially communicated, the objective was a phase-wise rollout of targeted reforms, with the first phase focusing on simplifying the legal text and removal of obsolete provisions, and the second phase dealing with more substantive reforms.

A draft of the Bill, after Cabinet approval, made its presence, triggering a debate among industry and civil society. With the Bill introduced in the Lok Sabha (or the lower house of Parliament) on Thursday, the expectations of a reformation are rife. Ireland and the United Kingdom have recently been cited as notable examples in steering their legislation for a dynamic reading and synchronisation of the law with modernity, according to the Organisation for Economic Co-operation and Development (OECD). Time is ripe for India to follow suit. 

Media reports, on the other hand, labelled the new Bill to be 50 per cent the size, though the Bill is roughly 25 per cent smaller. This is mostly due to the elimination of provisions that have been repealed. As an example, the definition of “taxes” would seem like a major simplification. The amendment merely removes reference to taxes such as ‘fringe benefits tax’, ‘banking tax’, ‘transaction tax’, and the pre-1965 ‘super tax’. The definition of “income”, however, has retained its character since 1961. Similarly, the reopening of assessment, which has seen most disputes in the past few years, has remained untouched, given that courts have commented on its drafting. This clearly does not achieve what the objective of phase one was.   

While the Bill is structured to make provisions more readable, most changes are about reorganisation rather than substantive reform. Explanations and provisos have been converted into numbered sub-sections, and terminologies have been rearranged for ease of reading without improving accessibility. The tax base, procedure and compliances remain the same, while introducing tables and pointers for easy reading – a welcome move. The promised simplification is, therefore, cosmetic rather than functional. The first reaction is that it is “old wine in a modular bottle”. 

Some of the proposed amendments will increase disputes. A prime example being expenditure deemed as excessive. Successive court rulings have held that commercial expediency cannot be questioned by the revenue; this principle seems to have been diluted. The interpretation of undefined terms in a treaty has been tightened. Previously, terms not defined in the treaty were first interpreted in the context of domestic law, and in its absence, the treaty law followed by public international law. The Bill now mandates that if a term is not defined in the Act, its definition must be taken from "any Act related to taxes" or "any other law of the Central Government". This narrows the scope of treaty interpretation and could potentially lead either to unintended outcomes or a range of tax disputes. 

Certain amendments on trust taxation are welcome. All classes of registered non-profit institutions such as public trusts, society, university/educational institutions have been identified. Under the extant law, significant disputes have arisen, leaving uncertainty with this class of taxpayers. Similarly, with the evolution of business trusts as a separate class of taxpayers, drafting inconsistencies with regard to availability of  pass-through status (where the unit holders and not the business trust is taxable) resulted in multiple amendments. The new code seems to have set out a consistent position for all forms of such business trusts such as investment trusts, REITs, venture capital etc. 

While the tax fraternity will analyse threadbare the 536 clauses in the Bill, at first blush, the Bill appears to be an exercise the lawmakers have thrust on themselves rather than a concerted effort to simplify the law. While the structuring has improved, the core issues of modernity, alignment of global best practices, and curtailment of disputes will remain an aspirational goal. The revamp exercise ought to be the fulcrum of India’s status as the go-to economy in the Global South, and its centennial ambitions of a developed-economy status. It is incumbent on the administration to continue with its spirit of the ‘D’ trilogy: to discuss, debate, and deliberate with stakeholders and solidify active engagement of domain experts. 

Mukesh Butani is founder and managing partner, BMR Legal Advocates. Seema Kejriwal is partner, BMR Legal Advocates