This part II is a conceptual framework and can very well be read in isolation from Part I. But reading of Part I will set the tone and context and will give a better perspective of the situation.
What is law
A set of rules which govern behaviour of people usually approved by a body representing a certain geographical territory or a state or nation.
Any law feeds on legislative enactments and judicial pronouncements. Income Tax law is also no exception to the same.
Also Read: Why we need Direct Tax Code – Part I
Process of forming an Act in India
In simple terms, an act of Parliament / State legislative assembly is a will of parliament / state legislative assembly about its expectation from citizen about their behaviour.
The word policy used here indicates a new subject which needs to be regulated or an existing subject requiring substantial changes.
The need for having a policy can come to forefront from any source like
| Sr. No. | Example of source | Example of an Act of Parliament or a change thereof |
| 01 | an important happening in the society | Abolition of section 377 of the Indian Penal Code |
| 02 | India being a signatory to various international forums etc. | India has committed to USA to implement FATCA for eradication of black money |
| 03 | Hydraulic pressure insisting for change in a particular policy | Right To information Act. |
Sometimes, a judgement itself may become basis for formation of a policy.
If the subject matter is complicated or needs exhaustive drafting, it is normally referred to a select committee of parliament / standing committee or judiciary may refer it to Law commission of India to study the subject matter and submit the report in this regard.
Such a report is also put in the public domain for Inputs from public at large.
in the said report act as a base for forming a Bill which is nothing but a draft of a proposed Act to be passed by the Parliament / state legislative assembly.
Agenda of respective audience
| Government | Legislature / Parliament | Judiciary | Public at large | |
| Concerns | Concerned about public response to legislation, and about the inherent intricacy of the legislative process (and resulting potential obstacles to enactment)
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Concerned about ‘principle legislation’ if uncertain how the Government will implement it. Concerned about bills including obscure and unsubstantiated technical details
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Concerned about possible difficulties in interpreting legislation and the unexpected consequences that implementation may produce
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Concerned about the burdens that new legislation can cause them and nervous about overlooking changes & their implications
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| Expectations | Expects legislation that achieves policy (or political) objectives.
May require either considerable detail to control delivery, or “principle” or enabling legislation to allow flexibility in policy implementation at a later stage |
Expect legislation that is fit for purpose e.g. properly prepared, with clear policy objectives.
Expect legislation that is drafted in a way that is intelligible and supported by explanatory material which substantiates more technical details. |
Expect objectives of legislation (and intentions of legislators) to be clear and unambiguous. Expect provisions that allow for flexible interpretation. Expect definitive and coherent commencement orders.
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Expect legislation with obvious objectives and clearly defined implications for them/their organisation or community.
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| Priorities: | Bills that get approved in a short time, with few amendments, and that guarantee immediate certainty of result and a positive response from the public.
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Bills structured in a way that reflects (and facilitates) the intricate parliamentary scrutiny and amendment procedures.
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Legislation ‘drafted for posterity’ that does not limit their ability to apply the law to circumstances that were unforeseeable by legislators
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Legislation that is simple, accessible, and easy to comply with and not unnecessarily burdensome.
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There is an overlap between the expectations of various members of the audience and they are not expected to be mutually exclusive.
Various problems at various stages
Following is a table where illustrative list of problems is given which ultimately culminates into an un-necessarily complex, ineffective, inaccessible, un-clear laws.
| Policy to Bill | Bill to Act | Enactment and Implementation |
| Dysfunctional relation between policy and legislation | Constraints of scrutiny process | In-accessibility of statute book |
| Un-necessary legislation | Externa pressures | Complex implementation |
| Chrismas-tree bill | Chrismas-tree bill | |
| In-effective consultation and pre-scrutiny | In-effective consultation and pre-scrutiny | |
| Public / media pressure | Presentational / political opportunism | |
| Inconsistent assessment of need of legislation | Inconsistent quality of explanatory notes( and supporting evidence materials) | Inconsistent quality of explanatory notes ( and supporting evidence materials) |
| Superficial assessment of legal framework | Drafting style(s) and bill structure | Drafting style(s) and bill structure |
| Dept. lawyers not given opportunity to advice at critical stages | Mixture of styles and quality of amendments | Mixture of styles and quality of amendments |
| Poor pre and post evaluation neglected | Burden created is more than benefits | Burden created is more than benefits |
| Political contingencies, political need for definite outcomes leading to over-elaboration and gold plating | ||
| Objectives / Targets – not practical not achievable | ||
| Alternatives to legislation not adequately considered | Discrepancies between schedule of need of change and legislative program | Structure and heterogeneousness make statute inherently difficult to navigate |
| Imprecise policy objectives | Length of bill and lack of time | Enforcement / implementation is inconsistent with existing delivery system |
| Reactive Policy | ||
| Rushed and inaccurate instructions | ||
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| Policy to Bill | Bill to Act | Enactment and Implementation |
| Example in Indian Context | Example in Indian Context | Example in Indian Context |
| Section 56(2) which brought gift’s within ambit of taxation was only meant for “purported gifts”. But these words were only in the speech of Finance Minister and not in statute book. | Supreme Court in a 5 member bench in the case of Indore Development Authority v Manoharlal & Ors. Etc. has held that
“3. The word ‘or’ used in Section 24(2) between possession and compensation has to be read as ‘nor’ or as ‘and’. |
Supreme Court decision dated 4-May-2022 where it accepted the judgements of 5 odd high courts that notices issued were void, exercised its power under article 142 to validate the notices to do the complete justice. A difference in Enactment and its Implementation |
Why Laws are complex
| category | Reason |
| In-effective | Does not achieve Policy Objective |
| Fragmented and difficult to implement | |
| Implementation is too problematic and generates substantial negative outcomes | |
| In-accessible | Difficult to identify and access upto date version of legislation |
| Language, style and structure are not user friendly | |
| Lack of adequate guidance / explanatory material | |
| Dis-jointed | Enforcement powers and implementation approach are inconsistent with existing delivery system. |
| Over-lapping regulations and over-complicated provisions | |
| Un-clear | Layered and heavily amended |
| Unclear applicability in different jurisdictions | |
| Ambiguous and contradictory provisions | |
| Un-necessary | Has become redundant and / or generates unnecessary burden to economy / society |
| No practical objectives or Targets – unachievable |
Macro Economics
At the time of Budget 2022
The overall corporate taxes have been established around 25% and there is overall international consensus for the said rate as well.
| As a percentage of GDP | Other Particulars | |||
| Contribution of | Total | Overall, only 13 crore returns have been filed including all types of assessees’ whereas India has a population of 160 crores. There are only 28,000-30,000 assessees’ (all-inclusive i.e. individuals, companies etc.) who have disclosed income above 1 crore. Hence the only way out remaining is to increase the tax base. | ||
| Year | Direct tax | Indirect tax | ||
| 2021-22 | 5.4 | 5.4 | 10.80 | |
| 2022-23 | 5.5 | 5.2 | 10.70 | |
Tax Incentives
History has witnessed that Tax incentives have been inefficient method of promotion of social causes. But at the same time, it cannot be eliminated. For understanding, a few are reproduced herein-below.
| Production based | Section 80-IA has provisions which give incentive on number of units of power produced. |
| Savings / investment based | Section 80C – Investment in PF / PPF |
| Profit linked based | Section 80-IB profit of developers and builders |
| Employment generation based | Section 80JJAA – additional deduction in proportion to new employees employed. |
Don’t Expect Surprises
a. It is so because most of the proposals which were to be introduced by Direct Tax Code has already been implemented in bits and pieces which may need further tunning to make it more organized.
b. Dividend has already made taxable in the hands of the recipient and the dividend distribution tax has been abolished.
c. Concept of Significant Economic Presence is already there on law-book.
d. Since 2019 including the Taxation (Amendment) Act, 2019 where the tax rates were brought down to 22% for companies with turnover below 400 crores and 15% for newly formed companies which are into manufacture and not into IT and ITES.
e. Definition of the word “liable to tax” and consequential amendment to section 6 of the Income Tax Act, 1961 whereby a citizen of India who is not a tax resident of any country / state will become tax resident of India.
f. All the working will be through faceless manner and over a period of last three years, finance ministry has implemented the Faceless working of Dept. Of course, much is yet to be achieved but legislative amendments are already made.
g. The Direct Tax Vivad Se Vishwas Act, 2020, an act giving one time opportunity to resolve.
h. India is signatory to substantial double tax avoidance treaties whereby signing one instrument namely multi-lateral instrument, it has achieved the impact of substance over form.
i. The Prohibition of Benami Property Transactions Act, 1988 has been amended with effect from 01-Nov-2016 (surprisingly few days before demonetization) by substantially widening its scope and making it operational.
j. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which came into force from 1-April-2015 aims to curb black money, or undisclosed foreign assets and income and imposes tax and penalty on such income.
What can surprise us!!!
(Re)Introduction of inheritance tax and / or wealth tax
There may be re-introduction of inheritance tax (earlier estate duty) and wealth tax. These taxes essentially tax the rich people only.
Monitoring Agricultural Income
It is a high time at least to make it mandatory for every person having agricultural income more than Rs. 1 crore to maintain books of account and file return of income.
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