New direct tax law: Focus should be on facilitating taxpayer services

Illustration: Binay Sinha
The Economic Survey 2017-18 has a telling piece of data for the officials at the Central Board of Direct Taxes (CBDT) out to draft a new direct tax law. The tax department accounts for 80 per cent of appeals filed before the Income Tax Appellate Tribunal and higher appellate forum. However, less than 30 per cent of these appeals are successful. A Task Force constituted to review the Income Tax Act, 1961, and draft a new direct tax law has its work cut out. Tax experts and businesses say the focus of the statute should be on facilitating taxpayer services and make the compliance process simple. 

“A simple process of filing tax returns would encourage more people to participate in the national tax payment and collection duties of citizens,” says Hitesh Gajaria, partner — tax & regulatory services, KPMG. Use of appropriate technology, optional auto-fill options in the tax return forms could help leverage information and data already available with the tax department, say experts. 

Abhishek Goenka, partner — tax & regulatory services, PwC, suggests a single return for Income Tax and Tax Deductible at Source (TDS) could help reduce the burden of compliance on taxpayers. 

Experts say the compliance burden and the level of data required from a taxpayer should be based on stratification of taxpayers. “More data should be sought for taxpayers who feature in the high-risk profile,” says Mukesh Butani, partner, BMR Legal.

According to Sudhir Kapadia, national tax leader, EY India, taxpayers face difficulties when validation errors are thrown up at the time of final uploading of files on the income tax website. “Ideally, all errors should be identified by return filing utility at the time of filling up Income Tax Return templates itself to ease compliance burden,” he says.

Many experts feel there is a strong need for a separate tax return form customised for foreign companies. “There are a number of details, such as profit and loss account and balance sheet, that should not apply to foreign companies not having any business presence or permanent establishments in India,” says Sanjay Sanghvi, partner at law firm Khaitan & Co. 

Experts say non-availability of tax credits is a sore point for many corporate taxpayers. “The entire system should be reviewed threadbare from a technology, process and implementation viewpoint,” says Butani. “If SEBI can get the dematerialisation of stocks, why can’t we get automatic tax credit mechanism?” he asks. As a way forward, Gajaria suggests that the tax department could gain the trust of an overwhelming majority of taxpayers if they give credit for TDS on the basis of the claim made by her/him.

Experts agree when it comes to assessment and scrutiny of returns, the procedure should be non-invasive in nature. “Fewer taxpayers should be picked for assessment or scrutiny,” says Butani. While experts welcome the e-assessment process, they are in favour of the taxpayer retaining the option to seek a personal hearing for the assessment officer. 

“The success of the e-assessment process will largely depend on how fast taxpayers and tax administration are able to embrace technology and work in a paperless environment,” says Kapadia.

Tax-related litigation and recovery of disputed tax demand continue to be a pet peeve for most corporates. Butani wants greater accountability at the first level of appeals. According to him, the first appellate level of appeals has lost its relevance as they tend to invariably agree with their subordinate officers’ views instead of independently reviewing the assessment. 

The way forward, say experts, is to have a deadline of six months to decide a case. It generally takes two years at the Commissioner Appeals’ level to decide a tax dispute, they add. 

Experts say there is need to put in place objective criteria for the tax department in filing appeals.  Any penalty should be levied only after second appeal stage, feel most experts.  While there is need to constitute separate tax benches at high courts to clear the backlog of tax-related cases, Goenka suggests the setting up of tax arbitration courts.  

Kapadia feels a system of private rulings, which is present in countries like the USA, Australia, Canada, Indonesia, New Zealand and South Africa, and the European Union could also be considered with appropriate checks and balances between confidentiality of taxpayer’s data and transparency of rulings.

The Wish List

Filing of returns
  • Focus on taxpayer services
  • Help centres for small and micro enterprises
  • Determine compliance burden through stratification of taxpayers 
  • Use appropriate technology, auto-fill options in tax return forms
  • A single return for Income Tax and TDS to help reduce the burden of compliance 
Grant of tax credits
  • Review the tax credit system from a technology, process and implementation viewpoint
  • Use the method of accounting followed by the taxpayer for grant of tax credit
  • TDS should not be mandatorily linked with the year of accrual or receipt of income; taxpayers should be trusted to make the correct choice
Processing/scrutiny of returns
  • Fewer taxpayers should be picked for assessment or scrutiny 
  • The e-assessment process is welcome, but the taxpayer must have the option to seek a personal hearing
Litigation and recovery of disputed tax demand
  • Reforms to address the administrative aspects of the dispute resolution process
  • Deadline of six months to decide a case
  • Objective criteria for the tax department in filing appeals
Penalties and prosecution
  • Penalty notices in a routine manner must stop
  • Multiple penalty provisions should be streamlined
  • The penalty should be levied only after a decision is made at the second appellate authority level

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel