Saturday, 5 September 2015

Tax Terrorism Explained

  • Why in news?
    • The Union government’s decision to waive, through an amendment to the Income Tax Act, minimum alternate tax (MAT) liability on capital gains made by FPI and FII is a welcome move, especially from their point of view as this will end “tax terrorism”.
    • Vodafone winning a tax case against the Indian authorities in 2014
      • Regarding capital gains tax on an offshore transaction
      • Instead of calling it a day, they amended tax laws with retrospective effect, making Vodafone liable for a tax on a past transaction.
    • Fuel prices: as much as ₹31 per litre out of petrol prices of ₹75 at the bunk flowed into the Government’s coffers as taxes
  • What is it?
    •  By tax terrorism, we mean putting illegal or extra legal pressure on the taxpayers to extract duty or deny refund which is not due or due only after following due process of law. 
    • For a layman this term implies a situation where the taxman uses his powers to fleece tax (or rather, extract more than what is due) from an honest taxpayer. This may be either in the form of unjust and inequitable tax laws or by enforcing the tax law on the general public in a harsh manner, which generally happens when the taxman views every transaction with suspect.
    • Many EXAMPLES of tax terrorism are there. 
      • To deny all refunds or pass adverse adjudication orders in the name of realising target of revenue. 
      • Another atrocious method is to file an appeal against tribunal's order in the high court even where the issue is one of classification or valuation for which the appeal lies in Supreme Court. 
        • Calcutta High Court in the case of CC vs Impex, 2014, has reiterated that appeal lies with Supreme Court. Once it goes to high court, it will take several years for the case to come up when the high court will say that the case is for Supreme Court to decide. In the meantime, the department will go on raising demands on the party every month and never finalise the case and pressurise the party to pay. This is a classic example of tax terrorism.  
      • General Anti Avoidance Rule (GAAR) proposed in the past with unrestrained power to tax officials was a concern.
      • high tax rates for corporates, 
      • MAT
      • Restrictions on the working of FDI and FII
  • Reasons for  Tax Terrorism:
    • Domestic tax laws allow the authorities to issue ‘demand notices’ even to people who have paid all their taxes for the year and have dutifully filed their returns.  
    • Complexity and multiplicity of tax laws (both direct and indirect) creates confusion opening door for both tax evasion and high handedness by tax officials.
    • Indian tax laws have been more oriented towards maximising collection by increasing tax assessments, rather than looking towards the need of the tax payers.
    • Exemption based tax structure adds complexity and provides a breeding ground for tax terrorism.
    • Tax Inspectors are prone to enquiries in possible cases of under assessments. As a result, they issue tax notices, just to be on safe side.
    • Tax targets are given on tax inspectors without consultations
    • Pressure on the govt to meet fiscal targets - usually impractically high - lacking fiscal marksmenship.
    • Complex web of transactions between subsidiaries of MNC using base erosion and transfer pricing strategies forced the govt to impose retrospective taxation on Shell, Vodafone etc. Though govt was fully empowered to impose such tax- attracted negative publicity
    • Many Indian units of foreign companies, especially located in SEZs were paying almost no tax by paying huge dividends to their parent companies, this led to the introduction of MAT and Taxation of dividend distribution. 
    • FPIs making money from security transactions in India - so we also wanted our due share in their gains - in the form of taxes
    • Instances of round tripping to introduce black money also forced the govt to take an aggressive approach against tax evaders.
    • The basic problem is the morass of Indian tax laws, a legacy of the socialist era. The system is adversarial and tilted towards enforcement rather than compliance.
    • The fact that the country needs MAT at all is a symbol of all that’s wrong with the system: The levy wouldn’t exist if loopholes didn’t allow some corporations to avoid tax altogether.
  • Consequences: (on these lines)
    • Ease of doing business
    • non-compliance 
    • predictability and stability lacks - hurting investor confidence
    • impact on Make in India
    • growth rates
    • industrial production
    • Esp - MSMEs
  • What is the solution?
    • Remedy lies in the finance minister making it clear to CBEC and CBDT that they must implement his statement of intent. 
    1. An anti-tax-terrorism directorate should be created which should work directly under the chairman of board. Wide publicity should be given to it.
    2. Ombudsman should be specifically authorised to entertain cases of alleged tax terrorism. Now it is not.
    3. Law of unjust enrichment should be abolished as it is a convenient tool to deny refund and thus send the tax payers to desperation.
    4. Fixing revenue target for commissioners must stop as it has lost significance today.
    5. Board should be made to have some respect for tribunal's order. Every order of tribunal favourable to the assessee should not be challenged. The percentage of victory in appeal is abysmally dismal.
    6.  Those commissioners, who filed appeal in high court rather than in Supreme Court, should be reprimanded and sent to training school for fresh training with probationers.
    7. Panel lawyers who file such cases should be dismissed from the panel.
    8. The recommendations of Tax Administrative reform Commission are apt in this regard.
      1. move towards simpler tax regimes, keeping into mind the needs of tax payers to establish synergy. 
      2. Use of ITC - bringing transparency. 
    9. Overhaul of the tax code - GST + DTC (or something similar)
    10. Regular interaction of govt with the industrial bodies/representatives
    11. DTAA, Advance Rulings, Taxation reforms based on research and consultations will bring more predictability for genuine investors. 
    12. pursue international efforts like OECD's base erosions and profit shifting agreements, within G20 to address larger problems which require multi-lateral agreements. 
    13. The Corporate law service cadre could assist in creating synergy between tax authorities & corporate sector.
    14. The Advance Ruling Authority could be given more teeth. This would avoid unnecessary litigation.
Conclusion:
With increasing dependency on FDI/FII, we need to carefully balance - "Progressive taxation" and "Tax terrorism".

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