By Anil J. Sathe, Editor
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.
