Global Economy

Does India really need a direct tax code?

By Sanjay Sanghvi

The Union Budget may be around the corner. But the task force set up by the finance ministry on the new direct taxes code (DTC) is scheduled to submit its draft by July 31. The task force was mandated to draft a new law to bring income tax in line with global best practices, while also addressing India’s economic needs.

Recently, the terms of reference was expanded to include faceless tax assessments, introducing amechanism for cross-verification of financial transactions, reduction in compliances, litigation and sharing of information among various economic agencies of the government.

While its stated objective is worth appreciating, the odds against introducing DTC are high, compared to ensuring that the existing income-tax law is administered rationally and with fairness.

A new law is certain to consume precious time and energy for all stakeholders — taxpayers, tax authorities, tax advisers, the judiciary — in their need to unlearn the existing law and to learn the new code from scratch. Having said that, the Income-Tax Act has been amended several times to keep up with changing business dynamics.

Whether these amendments have been measures to counter base erosion and profit shifting (BEPS), or to instal ‘place of effective management’ (POEM) guidelines in corporate taxation, the legislature has kept pace with the country’s economic needs. But one is left unsure as to what specific change is being sought to be brought in by having a new tax law altogether, instead of bringing it under the existing Income-Tax Act.

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It is well-known that tax administration has been the biggest litigator in this country. While GoI has taken steps towards doing away with litigation of small tax amounts where cases are in favour of taxpayers at the appellate level, there remains a substantial backlog of cases across all appellate fora and courts. It is unclear whether bringing in DTC will add to or subtract from the present pile-up.

Under the Income-Tax Act, several significant provisions have attained some certainty, thanks to judicial adjudication by tax tribunals and courts over time. As was highlighted by the Supreme Court in the Vodafone case in 2012, certainty and stability of law is fundamental for any fiscal statute. If a new tax code is introduced now, it would seem that such ‘certainties’ will need to be redefined all over again.

Instead of a new tax code, what is needed is a fair and reasonable administration of existing tax laws as contained in the Income-Tax Act, 1961. With the introduction of the general antiavoidance rule (GAAR) in the Income-Tax Act, ‘aggressive tax planning’ on the part of taxpayers stands sufficiently addressed.

Then there’s the matter of treaty abuse by ‘third country’ parties. The terms of reference of the task force are laudable. But these, too, can be made part of the Income-Tax Act and implemented to reduce tax disputes in India.

For instance, how does one reduce tax litigation when foreign direct investment into an Indian operating company from a prominent foreign economy is treated as unexplained cash credit (read: black money) in the tax assessment of the Indian company? Once again, fair and reasonable administration of tax laws, coupled with accountability of field officers, needs to be pushed as a solution.

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It is also not very clear whether the proposed DTC will articulate the provisions of income-tax law in a totally different manner, the new law being considered ostensibly to simplify matters and introduce best international practices. One hopes that GoI carefully considers the pros and cons of introducing the new tax code. It should also consider streamlining the existing Income -Tax Act instead of introducing DTC.

The writer is tax partner, Khaitan & Co


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