Direct Tax Code: A boon for IT sleuths!

In what the government has claimed to be an attempt towards bringing path breaking changes to the existing tax regime in India, the new DTC Bill, which is proposed to be implemented from April 1, 2012, will replace the five decade old legislation. In the foreword to the Tax Code, Union Finance Minister Pranab Mukherjee said that “the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, simplify the language and lower tax litigations.”

Personal income tax, as almost all salaried persons will agree, in our country is one of the highest in the world. More open and honest an employer is in terms of disclosing remunerations, worse it is for the employees because taxable income goes up. There is no denying that the present system is outdated and rewards dishonesty and non-disclosure of income by way of lower tax. The rationale for introducing DTC, government says, is to increase the efficiency and equity of the tax system by eliminating the plethora of tax exemptions or subsidies that create distortions. Its major policies include replacement of profit-linked exemptions with investment linked incentives, particularly for export units, and reduction in the tax rates to bring more people and companies under the tax net. Even the government wants a modern tax code in step with the needs of an economy, which is now amongst the largest in Asia. The international bodies too express similar opinion as Jeffrey Owens, Director of the OECD Centre for Tax Policy and Administration, said during a recent visit to New Delhi, “In India, tax reforms have lagged behind growth. It is a big challenge for politicians and policymakers to keep the pace of reforms with growth.” While the rationale behind the government’s proposals with respect to the DTC has been largely accepted as a right step in the right direction, a closer look into the provisions of the proposed tax code reveals India’s digression from a trust-based system of taxation to one which is based more on the element of distrust.

A case in point is provisions for penalty in the proposed DTC Bill. Currently, a penalty is levied on a person for concealing the particulars of income and if he/she is somehow able to convince the government that there was no intention to evade tax; he/she is let off without any penalty.

But in the new tax code, a person will be levied penalty even for under-reporting. However, the penalty for tax evasion will be reduced
to 200% of the tax due from the existing 300%. While the introduction of these penalty provisions are said to be aimed at curbing the willful attempt to evade tax, the maximum penalty mooted will not be more than two times the amount of tax payable with respect to the amount of tax base under reported. However, imprisonment for a term, which may extend to seven years, along with a fine has been proposed for a person who willfully attempts to evade any liability with respect to tax, interest or penalty. The DTC further states that a person shall be liable to penalty if he/she has under reported the tax base for any financial year and a person shall be deemed to have willfully under reported the tax base if his assessed income exceeds the disclosed income. “This means a number of proposals in the DTC are antithetical to a trust based regime,” says Nishith Desai, a senior international tax and corporate lawyer. Experts further believe that the proposed General Anti-Avoidance Rules (GAAR) are likely to have a critical impact on both the sophisticated taxpayer and the common man. Desai explains, “GAAR provides wide discretionary powers to the Commissioner of Income Tax to tax impermissible avoidance arrangements lacking commercial substance. While some developed countries have introduced some form of a GAAR to curb tax evasion, the GAAR framework proposed in the draft Bill is vague and does not have sufficient checks to check abuse of power."

In a way, the DTC Bill tends to make the penalty provisions mechanical, and hence underscores the very nature of a penalty provision in a taxing statute which is to be applicable only where there is a deliberate attempt to conceal income by the taxpayer. Experts too feel that penalty provisions which are activated ‘merely due to differences of opinion between the taxpayer and the revenue authorities would go against the principle of equity and justice’. Interestingly, apart from defaulters, the DTC even proposes to punish tax consultants who help in tax evasion. Thus, the Bill gives sweeping powers and blanket protection to IT officials for initiating court proceedings on matters relating to tax offences. But the question is: In the absence of clear, well-defined penalty provisions of the GAAR and no checks in place to control abuse of power, can the government guarantee that an average taxpayer will not be harassed by IT department?

Among other contours of the Bill, women will lose the right to special exemption which they are entitled to under the existing law. As regards firms and companies, the only relief is the removal of surcharges and cesses, which were even otherwise expected to be temporary. The prevailing rate at 30% will continue as against 25% in the earlier draft. There is no change in the rate of tax on distributed dividend by a company, which will continue at 15%. Minimum Alternate Tax for companies will continue with the tax rate jacked up to 20% from 15%. In a significant change proposed for the corporate sector, the DTC also plans to discontinue all profit linked incentives for area-based investments like setting up plants in backward areas or in the north-east with investment-linked incentives in specific sectors like infrastructure, and oil production etc. Further, under the new proposal, tax holiday will not be for a specific period, as is the case now, but will be equal to all capital and revenue expenditure barring land, goodwill and debts.

Thus, these reasons are amongst the many that experts and pundits have cited calling for a complete overhaul of the draft Code. The intention of the government is to ensure higher compliance, which was not possible through the ‘distrust-based’ regime three decades ago. Reason: Given the functioning of the IT department (where raids equal cash payouts), DTC (in its present form) will, in all probability, prove to be a boon, not for the common taxpayer but for our IT sleuths.