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Stable Vs. Dynamic Tax Laws - Strike The Right Balance!

Anil J. Sathe

8th November 2016 could be a day to remember in India's history. On that day, the Prime Minister announced demonetisation of 86% of the national currency, the stated objectives being the drive against terrorism, corruption, fake currency and tax evasion. How many of these objectives will be achieved time alone will tell. I had in my earlier editorial pointed out that demonetisation was a bold decision and for the sheer enormity thereof the Prime Minister deserved to be lauded. At that time, many had felt that as far as the drive against tax evasion was concerned demonetisation was only one small step, and had to be followed up by other actions.

Tax evasion is a malady from which most developing nations suffer and India is no exception. An insignificant number of citizens (approximately 2 %) pay taxes, the reason for the same being evasion and not avoidance. These actions have been taken by the government. We have now, Chapter X-A, in regard to general anti-avoidance rules (GAAR), the amendment to section 6 in regard to the tax residence of foreign companies by the invoking of the Place of Effective Management (POEM) Rules, a strong legislation like the recently amended being Prohibition of Benami Property Transactions Act, and the recent amendments to sections 115BBE and 271AAB and the insertion of section 271AAC in the Income-tax Act 1961. These will be effective from assessment year 2017-18, except the GAAR the provisions of which will take effect for assessment year 2018-19.

While the object of the government in using the Prohibition of Benami Property Transactions Act as well as the provisions of the Income-tax Act to which I have made a reference, cannot be faulted one really wonders as to whether the government has the wherewithal to administer all these changes fairly and effectively. This is because, the ability as well as the mindset of those on the ground have not undergone much change in the last few decades. Once these provisions start being implemented, the result would be a substantial increase in litigation. All economists are unanimous in their view that for a developing economy to continue on its progress path, stability and fair implementation of tax laws play a very important role. In the past, there have been a number of instances where interpretation placed on tax laws by the Apex Court has been overturned by legislative amendments, in many cases retrospectively. The Vodafone case is an example of the same. While no one can challenge the right of the State to make all the amendments to laws that it desires, it owes to both its own citizens as well as those who invest in the country, a reasonably stable tax regime on the basis of which their affairs can be planned.

Coming to using these changes in law to punish those who have already evaded law and prevent evasion in future, it is necessary to have an administration, which is competent, fair and humane. Lack of it is the cause for concern. For example, let us consider the Prohibition of Benami Property Transactions Act, which has become effective from November, 2016. Undoubtedly, in principle it is appropriate that the administration of this law has been entrusted to the Income Tax Department, since tax evasion is one of the prime purposes of keeping a property Benami. However, the consequence of a property being treated as the benami in terms of the Act is confiscation. As the law stands today, the `Initiating Officer’, the Approving Authority for this purpose is below the rank of Commissioner. Once an approval to the initiation process is given, the property can be attached. While this is certainly a step anterior to actual confiscation, it can have very serious consequences as far as the person against whom the action is initiated is concerned. Those of us, who practice on the ground, are conscious of how such approvals are granted in a casual and routine manner. Thereafter once a panel (Adjudicating Authority) constituted under the statute accepts that the property is benami, it is liable for confiscation, such confiscation being subject to an appeal before the Tribunal. While one wholeheartedly agrees that the law had to have the requisite teeth, what needs to be guarded against is that they should bite the person for whom they are meant and not maul an innocent person.

Let us then consider the amendment to 115BBE. This was possibly a reaction to opinions reported in various media that if, demonetised currency was deposited in the bank account and declared as income in the return of income for the assessment year 2017-18, one would get away with paying 30% tax. Therefore the provision was amended to take effect from assessment year 2017-18, providing a much higher rate of tax. The amendment however ought to have been made effective only for either a specific period or the intent could have been more specifically provided for. Now with the provision as it stands it, is likely to be used in situations and against persons for whom it was not intended.

This government in the past has been accused of tax terrorism. One would still believe that the intentions of the government are laudable but those in power must apprise themselves of the realities and difficulties on the ground. What one certainly wants is not inertia in tax laws but stability and fair implementation. Laws must necessarily change to ensure that the war against corruption and tax evasion is won. They must therefore be stable yet dynamic; the challenge is to strike the right balance. The government must appreciate that all things cannot be changed overnight and the situation on the ground will require patient acceptance for some time. I would therefore like to end with the popular four lines

O Lord, give me the courage –

To change the things that I can change

The willingness to accept those that I cannot –

And the wisdom to understand the difference
between the two.

I only hope that the Lord grant the powers that
be this wisdom.