A committee set up by the government to change direct tax laws has suggested several taxpayer-friendly measures to improve the ease of doing business, reduce litigation and accelerate the resolution of tax disputes.
In its first report made public on Monday, the committee, headed by retired high court judge R.V. Easwar, has recommended simplifying provisions related to tax deducted at source (TDS), claims of expenditure for deduction from taxable income and for tax refunds.
It proposed deferring the contentious Income Computation and Disclosure Standards (ICDS) provisions and making the process of refunds faster.
Some of these recommendations that require amendments to the income-tax act are likely to be a part of the Union budget to be presented on 29 February while some other changes in administrative procedure can be implemented through official notifications by the income tax department.
The committee has asked the income-tax department to desist from the practice of adjusting tax demand of a taxpayer whose tax return is under assessment against legitimate refunds due.
It has also proposed deletion of a clause that allows the tax department to delay the refund due to a taxpayer beyond six months and suggested a higher interest levy for all delays in refunds.
The panel also proposed that stock trading gains of up to Rs.5 lakh will be treated as capital gains and not business income, a move that could encourage more retail investments in the stock market.
The committee has recommended that TDS rates for individuals be reduced to 5% from 10%. It has also clarified that dividend income on which dividend distribution tax has been levied should be treated as part of total income. It also sought to provide an exemption to non-residents not having a Permanent Account Number (PAN), but who furnish their Tax Identification Number (TIN), from the applicability of TDS at a higher rate.
The committee also favoured deferring ICDS.
“Taxpayers are already grappling with regulatory changes of the Companies Act, 2013, Ind-AS (Indian accounting standards) and the proposed GST (goods and services tax). Industry should be allowed more time to deal with another change of this nature. The committee understands that the taxpayers feel that many of the provisions of the ICDS are capable of generating a legal debate about which at present there is no clarity,” the report said.
These standards, 10 in all, which will affect the way income is calculated, were expected to come into force from financial year 2015-16.
The committee also recommended that most of the processes of the income-tax department should be conducted electronically to minimize human interface. To this effect, it suggested that processes such as filing of tax returns, rectification of mistakes, appeal, refunds and any communication regarding scrutiny including notices, questions and documents sought should be done electronically.
To make it easy for small businesses, the committee recommended that the eligibility criteria under the presumptive scheme be increased to Rs.2 crore from Rs.1 crore. It also recommended launching a similar scheme for professionals. The presumptive tax is levied on an estimated income and makes life (and work) easier for small businesses.
Under the presumptive income scheme, such professionals or businesses will not need to maintain a book of accounts but just pay tax based on presumptive income calculations. For instance, for professionals it is proposed that 33.3% of their previous year’s receipts will be taken as income on which they will have to pay tax. If their profits are much lower, they will have to maintain a book of accounts clearly categorizing expenditure and pay tax accordingly.
Following up on a promise to provide a predictable and fair tax regime, the government set up the 10-member committee under Easwar to overhaul the income-tax act of 1961 to remove ambiguities in the tax laws that cause unnecessary litigation and update the laws based on various judgements.
An estimated Rs.5 trillion is locked up in litigation across various courts and tribunals.
Rajesh H. Gandhi, partner, Deloitte Haskins and Sells Llp, said the recommendations will go a long way in reducing litigation, but it remains to be seen if the government will accept these recommendations and make changes in the budget.
“The committee has suggested not treating short-term gains up to Rs.5 lakh from sale of shares as business income. This will remove the confusion of treatment of such income as business income or capital gains. Some of the other suggestions like not allowing tax authorities to reopen or revise assessments on the basis of audit objections or no levy of penalty where the taxpayer has taken a position relying on court cases will reduce litigation on some of the common controversies,” he said.
Ketan Dalal, senior tax partner, PricewaterhouseCoopers India, said in a note that though a large number of recommendations are procedural, they are useful and pragmatic.
“These relate to reducing the TDS rates to avoid the need for chasing refunds, streamlining certain compliance aspects and a variety of recommendations on refunds, including creating disincentives for the tax department to hold back refunds,” he said.