Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Do we need to overhaul the existing income tax laws?

What is really needed is not a new tax law, but simplification of procedures, reduction of paperwork (or online work), and introduction of accountability of tax officials

Recently, the Prime Minister, while addressing a conference of Commissioners of Income Tax, is reported to have stated that there was a need to overhaul the old income-tax structure, as the existing tax laws are over 50 years old and do not fit in with today’s environment and present economic situation.

One reads reports that the tax authorities are initiating work to draft a new income tax law, based on these comments. The question that springs to mind is: do we really need a new income-tax law?

To understand this, we first need to understand the shortcomings (both purported and actual) of today’s tax laws. One of the observations is that the tax authorities are not able to catch tax evaders. Under the current system, it is stated that people came under the tax net only after demonetization, or when properties were confiscated or when shell companies were found. About 90% of resources are being utilised for scrutiny assessment, which only accounts for 9% of the tax collection. This is when 90% of the collections come from advance tax, while huge resources are spent to collect the balance. 

Do these shortcomings reflect a problem in the tax laws, or problems in the tax procedures and tax administration? These are clearly administrative failures of the tax department, maybe partly due to the current tax procedures. There is therefore clearly and definitely a need to provide facilities to tax officers in the form of increased flow of information, better systems and better procedures, but there is a far greater need to bring in accountability of tax officers to ensure that they are hauled up if they cannot deliver results even with such improved tools. In fact, the Prime Minister had, in the same speech, pointed out several aspects where the tax administration needs to improve. Unfortunately, one does not hear of any steps being taken to tackle these problems, with the same zeal as shown in trying to frame a new law. 

Past experience with the Direct Tax Code shows that a new tax law is generally drafted with an approach of overruling all past court decisions, which had settled issues in favour of taxpayers. In fact, our tax law is riddled with annual amendments made just for this purpose. 

For a small fraction of taxpayers who are tax evaders, all taxpayers are made to suffer absurd provisions, which end up with taxpayers having to pay tax on incomes higher than their real incomes, on account of various deemed incomes.

On the one hand a claim is made that tax rates have been reduced, but on the other hand one sees provisions whereby a taxpayer ends up paying tax on more than his real income. Thereby, the effective tax on the real income remains more or less the same, or increases. 

Also, in recent years, one notices that the committees set up to draft laws or suggest amendments consist only of tax departmental officers. Obviously, therefore, the ultimate outcome is a draft based on only tax officers’ perceptions, and which considers only problems faced by tax collectors, without considering the difficulties faced by taxpayers and the ground realities. 

Even if a balanced committee is set up, few of the measures suggested are actually implemented. Late last year, the Justice Easwar Committee had submitted its final report before the Union Budget. This report has not yet been made public, though the Budget has come and gone. One understands that the committee—consisting of a retired High Court judge, tax professionals as well as tax officers—had made several suggestions to reduce the problems of taxpayers, which were not implemented, and hence the report is still under wraps. Therefore, one apprehends that the intended new tax law is likely to be loaded against and unfair to taxpayers. 

The other important fact is that businesses have been reeling under the impact of the many significant changes in various laws effected during the past 3-4 years. We have seen a new Companies Act, with parts of it being notified in stages and amendments to it from time to time: demonetization and its fallout; new accounting standards (Ind-AS); a new complicated Goods and Services Tax (the full complications of which will be felt in the near future); various changes to income laws and compliance—such as a limitation on allowability of interest, income computation and disclosure standards; and more. A large part of the time and effort of businesses and professionals (particularly small and medium ones) has been spent in struggling to cope with these many complex changes in laws, which has obviously diverted their focus from their business operations or profession.

A new tax law would only add to these woes, destroying business confidence. Experience also shows that it would further increase the tax litigation, given the fact that the scheme and language of the new law would be quite different, unsettling the settled legal issues. Where is the ease of doing business? 

What is really needed is not a new tax law, but simplification of procedures, reduction of paperwork (or online work, as is the present position) and introduction of accountability of tax officials. This can be achieved through mere changes in the rules, provided there is a will to do it. One hopes that, in the zeal to bring in new laws, taxpayers do not end up being the sufferers, having to bear the brunt of a new tax law.

Gautam Nayak is a chartered accountant.