To simplify Income Tax laws, the government today set up a committee under a former Delhi High Court judge to identify clauses that lead to litigations and suggest modifications to bring predictability and certainty in tax laws.
The 10-member panel, to be headed by Justice RV Easwar, (Retd), has been asked to submit a preliminary report by January 31, so as to help incorporate some of them in the Budget for 2016-17.
The committee has been asked "to study and identify the provisions/phrases in the (Income Tax) Act which are leading to litigation due to different interpretations." Finance Minister Arun Jaitley said the main idea behind setting up the panel is to make the IT Act more simpler.
"We have over the last few months been resolving a lot of past issues and now time has come to look at some provisions of the IT Act to look at how their drafting quality can be improved in order to avoid ambiguity so that everybody is certain as to what the Act itself says," he told reporters.
Also, the panel will study and identify the provisions which are impacting the ease of doing business as well as identify the areas and provisions of the Act for simplification in the light of the existing jurisprudence.
The terms of reference of the committee also include to give suggestions on "alternatives and modifications to the existing provisions and areas so identified to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection."
"We have constituted a committee to simplify the provisions of the IT Act. The committee would be headed by Justice Easwar who was the chairman of ITAT and judge of the High Court in Delhi," the FM said.
"It has several expert both from government and private sector in it and this committee will be doing an ongoing study from time to time. So, as and when it keeps giving one bundle of suggestion with regard to simplification we will examine them and whichever are found acceptable we will try and simplify those provisions of the IT Act," he added.
CNBC-TV18 spoke with Justice RV Easwar along with Ketan Dalal of PwC India to get their views on what the development means.
Below is the verbatim transcript of the interview..
Q: I am looking at the terms of reference. It says to study provisions in the act which are leading to litigation, to study provisions which are impacting the ease of doing business for implication in the light of existing jurisprudence, it is all very broad, and if I may say so - vague. Can you throw some light on what specific issues or areas your panel is going to address?
Easwar: I can't fully agree with you that these are vague terms. There are actually four sub-reference and the main thrust of the terms of reference appears to me that the litigation should be reduced to the bare minimum and what is precisely necessary and that itself is a simplification and that is why they have said in clause 1, identify the provisions and premises of the act which lead to litigation. So, if there is simplification and clarity on certain terms, for example there are several incentive provisions, chapter 6(A), there are several terms which have not been clearly defined. That is one area which the committee will probably be looking at.
Then the other area will be the section 9 where there are certain terms which have been judicially interpreted in a certain way and whether anything can be done to achieve uniformity in the way in which those terms have been interpreted by different tribunals and courts that would be one area. So, the litigation becomes minimum which automatically will answer term number two which is ease of doing business. If there is less litigation there is ease of doing business. This is one aspect which we would like to examine.
The other aspect is there are two kinds of provisions in the income tax act broadly. One is the substantive provisions and the other is procedural provisions. The scope for simplification in substantive provisions will have to be conditioned by term number four without substantially impacting on the tax base. So, there probably the scope is not as much as the simplification process of the procedural provisions.
The procedural provisions will also impact term number two, ease of doing business and there are certain cumbersome rules, procedures, forms to be filled up which probably need to be simplified. This is one area which the committee would like to look at. This is my prima facie view and we have experts from all sides. The chartered accountant profession, the former law secretary is there, then the investment side is also represented and we have some very competent and able officers from the revenue service. So, all these issues will be addressed.
Q: If I could get you to expand for us what you said as far as Section 9 is concerned and if I could get you to link that to the terms of reference and clause number 4 in the terms of reference which says to suggest alternatives and modifications to existing provisions and areas to bring about predictability and certainty in tax laws. This has been the big bugbear as far as investors are concerned - the retrospective tax law that was brought in by the former UPA government. This is going to be something that you will be addressing, a possible modification as far as the retrospective amendment to Section 9?
Easwar: That is right. I have to enter a caveat here, this Income Tax Act has been there since 1961 for almost 54-55 years. Several views have been taken in respect of almost all the provisions either by the courts or the tribunals and all that and also by the Authority for Advanced Ruling. There has to be a reconciliation wherever there is a conflicting interpretation. Number two, it has always been my view that simplification is probably the most difficult, it is not so simple to simplify.
The business models have become complex over the years. It is no longer a very simple business model with cross border investments and all that. If the business models have become complex perhaps I am inclined to think that the tax laws also need to be little complex to meet those complex situations. However the secret lies in trying to be as less complex as possible. So, I would rather think of dealing with those situations the way in which the government wants but in not so much of a complex language but a simple language so that everyone is clear and therefore the litigation is brought to minimum. So, time and expense in litigation is not lost.
Q: What would this mean because you have said that the committee will look at the issue of retrospectivity specifically retrospectivity with regards to Section 9. What would it then mean for the ongoing cases, for cases where arbitration proceedings have already been initiated for instance in Vodafone, for cases which are currently in court?
Easwar: I did not say anything about retrospectivity because that is probably not the scope of the terms of reference. It is entirely for the government to consider whether the provision for taxation is to be prospective or retrospective. I don't see anything in the terms of reference to the committee to deal with that situation. I think that is outside the scope of this.
Shereen: You have listened to what Justice Easwar has had to say. Any comments or any questions that you would have for Justice Easwar?
Dalal: A couple of things as Justice Easwar pointed out. The substantive and the procedural part and it is on the second one that I do want to make a couple of comments. My belief has been that in the context of Indian income tax legislation the procedural and the administrative part is as important and sometimes is more important than the substantive part and specifically when you link it to the ease of doing business I do hope that the committee will go into quite a few of those provisions.
For example provision relating to withholding taxes and tax deduction at source has been a major issue for corporates, who actually say that we are visited by multiple number of adverse consequences in litigious matters where we believe we should not have deducted and the government or the tax department thinks we should have. So, those kind of controversies. Say, for example let's say, a foreign company required to take a Permanent Account Number (PAN) that directly impacts ease of doing business and becomes a major issue on the ground, things like that.
On the substantive part there are provisions like, let us say, for example in the context of companies undertaking restructuring. There are a large number of provisions which are really either redundant or not practical. For example impracticalities in the definition of demergers and things like that. So, I do hope that the committee will consider all these in the context.