28 Nov 2017 13:46 IST

How to make income tax law less taxing

The task force should consider dropping the anachronistic search and seizure rules

The Central Board of Direct Taxes has set up a new task force to draft appropriate direct tax legislation afresh. It is headed by Aravind Modi, member (legislation) CBDT, as convener and five others, including a chartered accountant, advocate, consultant, and retired officer. The terms of reference of the task force are: the direct tax system prevalent in various countries; international best practices; the economic needs of the country; and any other connected matter.

While it will set its own procedures for regulating the work, it is expected to submit its report to the Government within six months.

Complicating matters

In the past, we had the Mahavir Thyagi committee, the Wanchoo commission, the Chelliah committee, the Chokshey committee, the Eradi committee (working group) and the Kelkar task force, all set up to make recommendations for changes in the law. Aravind Modi was handpicked by the former finance minister to draft the Direct Tax Code (DTC) and the Code, meant to simplify the tax law, ended up with more complications, and more sections and chapters. Some of the ideas given in the Code were taken into the existing income tax law by way of amendments but the DTC itself was done away with, and rightly so.

There is no gainsaying the fact that the present income tax law requires radical re-adaptation. But every attempt at simplification results in the law getting more complicated. The situation now prevalent on the fiscal front is not what it was in the past. The law has to march with the times. In this context, certain core areas may have to be given a radical relook in the law.

Search and seizure provisions: Every search of the residential and business premises of the taxpayer involves an invasion of his privacy. Today, there is an explosion of information technology and the I-T department is flooded with information from all sides. The Aadhaar Card, Form AS 26 and the network of taxpayers online, the email, the obligatory banking transactions, have all given the I-T department weapons they can choose to use without resort to search and seizure. The provisions for search and seizure lead to harassment on a large scale and the final results are rarely known despite the lapse of years. The data in the table gives figures of search warrants and value of assets seized in the last three years.

Demonetisation has given the department sufficient work for several years to probe bank deposits in lakhs and crores. According to the finance ministry, the cash deposits in banks requiring investigation will be of the order of ₹3 lakh crore. The task force should examine if in the light of the IT revolution, the time has come to drop the provisions in the I-T law to resort to searches, surveys and seizures. This will end all accusations of tax terrorism and prove Narendra’s Modi principle of less government and more governance.

Basically, fruitless

Taxable entities: Income tax law has divided the PAN category of taxpayers into sections: the Association of Persons, Body of Individuals, Company, Firm, Government, Hindu Undivided Family, Artificial Juridical Person, Local Authority, Limited Liability Partnership, Trust and Individual. A break-up of the tax collection from these entities will show that the work related to most of them is not fruitful.

The task force should examine the suggestion that the PAN category should be limited to corporate and non-corporate entities and abolish the rest. This will lead to simplification of the tax law. It is also necessary that the special status of HUF should be done away with because this leads to artificial tax planning and splitting of incomes. The existence of the HUF as a separate entity is all the more questionable in light of recent amendments to the Hindu law enabling daughters to be coparceners along with sons. The HUF is now an anachronism. The abolition of HUF can be a step in the direction of a uniform tax-code applicable to all persons without reference to religion and faith.

Agricultural income: At least now, the task force should take up seriously the question of taxing income from agriculture. A small minority in the millionaire and the billionaire group of taxpayers uses the facility in law to offer income otherwise taxable in the garb of agricultural income. If the Constitution has to be amended, so be it.

Appeals and charity

Tier of appeals: At present, we have appeals from the assessing officer to the CIT (appeals), the ITAT, the High Court and the Supreme Court. In between, we have the Settlement Commission and the Authority for Advance Ruling. The time has come to review this. A murder accused can only go from the Sessions Court to the High Court and the Supreme Court. A rich taxpayer can fight on many fora with no finality in sight for about 15 years. The task force should consider abolishing the post of CIT (appeals), which is not independent. CIT’s (Appeals) are all under the Ministry of Finance. Similarly, there is a case for abolishing the Settlement Commission.

Charitable trust: Much of the complication in litigation in I-T law revolves around the provisions for exemptions and deductions. The Government has never been comfortable with the claims of charitable trusts for exemptions. It is necessary to consider whether the tax law should promote philanthropy at the expense of the taxpayer. Do those who drop cash and valuables in the Tirupati hundi do so for the benefit of tax relief ? Certainly not. Chapters relating to charitable deductions can be done away with. The same holds good for incentive deductions. Removal of these will simplify the tax law and reduce the number of sections in the law.

Demonetisation and GST have provided opportunities for the I-T department to widen the tax base and successfully investigate tax frauds; these should be fully utilised. Digitalisation is a revolution that has happened and is happening. The I-T department should optimise these opportunities.

(Ramanujam retired as Chief Commissioner of Income Tax and is, with Sangeetha, an advocate in the Madras High Court. The article first appeared in The Hindu BusinessLine.)

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