“Acche Din” in Indian tax regime –Still a distant dream?

Can there really be acche din in a country with taxes? Well, the tax policy of a country bears the answer. The Trump reforms has set a glaring example of how a Sovereign Government can work to prevent base erosion of valuable resources and jobs and make tax heavens a no preferred choice for businesses. That’s an example of Acche Din

Can there really be acche din in a country with taxes? Well, the tax policy of a country bears the answer. The Trump reforms has set a glaring example of how a Sovereign Government can work to prevent base erosion of valuable resources and jobs and make tax heavens a no preferred choice for businesses. That’s an example of Acche Din

The Indian Union Budget 2018 was presented on 1 February 2018 amidst a canvassed sentiment of India Rising and bullish markets. Expectations of firm steps towards boosting economic growth and investor confidence were certainly basic, especially in the wake of current global economic developments, the most recent impactful one being the US Tax Reforms.

There seemed to be unmatched convergence among the various segments of the society about effective lower tax burden on genuine taxpayers in India. This was more so, in light of the corresponding rates in other comparable nations and further assuming that the demonetization and GST have been success reforms by the Government. Priorities change and that is a constant over time and this Government also does not prove to be an exception. Barring the wow propositions like Healthcare cover for the poor and lower middle class, thrust towards better education system and digitally and infrastructurally robust India, are there really any material value propositions? Not to ignore that the wow priorities, especially the healthcare proposal are too ambitious and the funding outlay could lead to greater complications like never before. Additionally, since there has always been a substantial divide between proposals and practices, the wow factor is short lived.

Certain points for introspection as follows may throw some light on how the Government might fare against basic expectations of maintaining if not boosting stakeholders’ and investor confidence in India’s state of affairs.

1. No attempt to do away with complex tax rules promoting litigations

The debate about whether Minimum Alternate Tax or Alternate Minimum Tax regime should continue is not new in India. MAT with its inherent areas of controversy may certainly not be a preferred proposition should there be genuine intent to simplify the Indian income tax law. With the commencement of IndAS reporting and coupled with interpretational issues around the same, MAT computations have become potential areas of tax controversies, especially in light of transition year’s treatments. Additionally there have been expectations that ICDS shall be repealed, especially in light of divergent interpretation issues inherent therein. FAQs cannot be a solution to address evolving tax issues. With certain ICDS specifically becoming a part of the Act, deeper review of historical positions and impact of required changes if any, becomes imperative. Against contentious issues under the law, high cost litigation continue to be the temporary remedy, the unfortunate part being, law itself may be amended to suit the Government if Indian courts largely favor taxpayers after substantial elapse of time and efforts.

2. Demarcating heavy expenditure outlays for the agriculture sector without any tangible betterment to farmers thus far

India being an agricultural country, tax exemptions to the said sector has always been a top priority for every Government. Income from agriculture is completely exempt from income tax. There are many other economic benefits that are advanced to the said sector at large. In spite of all these benefits why do the farmers commit suicide or continue to live below poverty lines? Is the real economic benefit hoarded or siphoned off by some rich and influential sections within the society and the budget repeatedly augments the wealth creation of these sections? This Budget again has aimed to dole out expenditure outlays for the said sector of the society and has even expanded the scope of exemptions to include such companies which provide post harvest ancillary services to the agricultural sector. As per the newly inserted section 80PA, 100% profit linked deduction to be allowed to registered Farmer Producer Companies having total turnover of less than INR 100 crore and engaged in any of the following business:

  • the marketing of agricultural produce grown by the members; or
  • the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to the members;
  • the processing of the agricultural produce of the members

Are mounting exemptions to the agricultural sector really the need of the hour? Are these expenditure outlays breeding corruptions, generating tax-free incomes towards unjust enrichment and inequality?

3. No measures or action to contain and minimize tax controversies

The pledge of providing this nation an honest, clean and transparent Government should ideally include a stable and certain tax environment, comprising of simple tax law, an honest and transparent tax administration, speedy dispute resolution mechanisms to settle interpretation issues. In order to have a transparent tax system, the foremost objective should be to simplify tax law and minimize tax controversies. However, this Budget has not seen any major tax amendments either towards bringing in greater certainty or alleviating tax payers’ confusion in complex tax norms viz, POEM, GAAR, IndAS MAT interpretations, Transfer Pricing or targeted time based resolution of tax controversies. The Finance Minister has announced a new scheme for tax scrutiny which will aim to use technology and eliminate the interface between the assessing officer and the assessee thereby imparting greater transparency and accountability. However, the Rules for implementing the said scheme are awaited. Till such rules are announced it is difficult to say as to how best would the said scheme work.

Besides reforms in tax assessment procedures, there were expectations to revive the Benches for Authority for Advance Rulings. However, no such reforms could be seen in the current Budget, thereby negating the perception of India Rising or India being a place with ease of doing business.

4. No respite to the genuine taxpayers in spite of specific recognition of the contribution to the national exchequer

Salaried class may be the most disappointed with the Finance Bill 2018, more so because of an undesirable eyewash on the aspect of newly reintroduced standard deduction. As against the expectation of reduction in the tax rates or increase in the income slab and even after some mention by the Hon’ble Finance Minister, the Government has provided a nominal relief in the form of standard deduction of Rs. 40,000 replacing the current exemption in respect of transport allowance of Rs. 19,200 (Rs. 1600 per month) and medical expenses of Rs.15,000. Thus, the net take away will be of Rs. 5,800 i.e. the total taxable income of a salaried individual will reduce by Rs. 5,800. Assuming the individual is taxable in the highest slab rate, the basic tax benefit will be Rs. 1,740. Another amendment which shall impact the salaried individuals and which shall negate the aforesaid tax benefit is the replacement of education cess of 3% by health and education cess of 4%. Thus, the standard deduction of Rs. 40,000 will have no tax benefit for individuals earning salary of greater than Rs. 5,00,000 since the said benefit shall be negated by the higher tax rate in the form of increase in the cess by 1%.

Therefore, the salaried class which pays taxes diligently and contributes to the exchequer of the Government is yet again ignored by the very same Government while drafting its budget proposal. The same salaried class bore the temporary operational burden due to demonetization and was indeed hopeful that the Government would live up to the basic expectation of lower taxes, but alas, they have to wait indefinitely for this acche din!! It is an irony that even the poor taxman who garners the vital tax revenue for government spending is also sailing in the same boat being a salaried taxpayer himself.

5. Is the India tax policy truly start up friendly?

Sometimes Government initiatives are hyped more than it really caters to. The Startup India movement is certainly one of the apparently promising government initiatives to augment entrepreneurial prowess in India. Indeed novel on objectives, a young entrepreneur irrespective of financial strength would be tempted to dream big and do big. Generally once a young entrepreneur with little financial means embarks on the dream project, funding beyond a minimum level is not an easy phenomenon. Practically, the entrepreneur may be forced to gaze for funding for various factors – lack of ease in procedures or approaching investors, weak financial background etc. Finally, even if such entrepreneur after arduous efforts succeed in lining up credit at a premium, taxmen do not wait to engulf such premium as disproportionate income received under section 56 of the Income Tax Act, ignoring the spirit of the Start up India mission. Tax Holiday benefits and relief under section 79 on account of change in shareholding come with riders and become relevant only when a start up’s income generating machinery is in operation. Hence, is the start-up story similar to the famous childhood fable of the stork and crow where the stork invites the crow to dinner but serves the dinner in a long earthen pitcher only for the crow to find it impossible for consumption. Is the Government genuinely helping the start- up community, if not, is the hype towards Start up India desirable?

6. Relentless tax terrorism in spite of promises to curb such practices being a part of election manifesto some years ago

The Government has not made many efforts to curb the ongoing tax terrorism, which the taxpayers are facing. With each passing day and as the financial year approaches towards March, the tax authorities use coercive measures to collect tax from the taxpayers in order to meet their internal tax collection targets. It is an irony that regular taxpayers are not spared to be chased for meeting revenue collection targets. Even the newspapers carry reports of sheer pressure by the CBDT on the field officers in the revenue department to meet revenue collection targets –when the Government seeks to hype about Less Government and More Governance, who is leading this tax terrorism and for what genuine public welfare expenditure? If one carefully introspects, the taxman toiling hard to meet the Government’s exchequers targets may be actually more stressed in his office in return of low pay grades – so is tax terrorizing even the taxman?

Cases such as non-granting of taxes paid in spite of the said taxes reflecting in the Form 26AS as generated on the income tax website to calling the tax payer and asking him to pay additional advance tax in the March quarter are some of the resorts which the tax payer are adopting. The trend of questioning the taxpayers for reasons of shortfall in advance tax is also not a very old trend. This sheer harassment by the tax authorities has resulted in a loss of faith in the tax administrative system of the country. In short, if the Government’s demonetization and other anti-black money initiatives have borne fruits and thereby the genuine taxpayers are entitled to some tax relief, at a basic, no questions from the tax authorities, isn’t the continued high handedness by the revenue authorities indicators of an draconian tax environment?

7. Making PAN mandatory for more tax payers, especially non-residents in a subtle manner

The Finance Minister has indicated his desire to use PAN as Unique Entity Number (UEN) and thereby proposes to expand the list of cases requiring application for PAN. As per the proposed amendment to section 139A, a person, not being an individual, who enters into a financial transaction of an amount aggregating to INR 2.5 lakhs or more in a financial year shall be required to apply for PAN. Further, the Managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer or any person competent to act on behalf of such entities shall also be required to apply for PAN. This is because the objective, as expressed in the Memorandum to the Finance Bill 2018, is to link financial transactions with natural persons.

Finance Act 2016 had amended the provisions of section 206AA to provide an exemption to non-resident from being charged at the higher withholding tax rate in the absence of PAN in case of certain transactions. Rule 37BC of the Income-tax Rules, 1962 was inserted wherein it was stated that where a non-resident does not have a PAN, provisions of section 206AA shall not apply in respect of payment in the nature of interest, royalty, fees for technical services, and payments on transfer of any capital asset, if the deductee furnishes certain details and documents as specified.

Post the aforesaid amendment to section 139A, relaxation given under section 206AA may become redundant and all the non-residents (other than individuals) shall be mandated to obtain PAN in India in case if they enter any financial transaction in India including the aforesaid transactions as listed in Rule 37BC.

There may be other deeper aspects of debate and thereby “acche din” appears to be far from being a reality, the more one delves deeper.

What really contributed to the above? Is it the political mileage resurrection drive or simply an attempt of relentless tax collection from helpless taxpayers towards wasteful public expenditure that has been a norm since time immemorial? Managing multiple economic forces, especially garnering tax revenue would always be a challenging task if the stakeholders do not see credence in the government initiatives and allied spending. It would be worthwhile to watch out for any iceberg effects emanating from the budget proposals in future. Tax base widening attempts without certainty, prudence and transparency in public spending avenues coupled with piling instances of tax controversies can only complicate things and undo any genuine efforts towards the long term.

Term : ICDS Income Tax

Information for the editor for reference purposes only

Sandeep Dasgupta is a Senior Manager and Zainab Bookwala is a Manager with Deloitte Haskins & Sells LLP. The views expressed herein are personal and not that of the firm.

Categories: Income Tax

View Comments (1)

  • This Finance Bill should have signalled theend of the MAT regime. AMT is definitely preferable as it only restricts certain deductions.
    Prosecution u/s 276 CC should be for filing beyond the time u/s 139(4) and not 139(1)



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