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Towards a taxpayer-friendly income-tax regime
January, 27th 2016

The report indicates a refreshingly strong focus on reducing the undue hardships faced by taxpayers without impacting the tax base or revenue collection

The first batch of recommendations by the Income Tax Simplification Committee, headed by Justice RV Easwar, appears to be largely in line to meet the objectives set in the terms of reference given to the committee. These objectives—relating to identifying the provisions in the Income-tax Act that were leading to litigation on account of differing interpretations, and those which were impacting the ease of doing business and recommending alternatives or modifications to such provisions—are key to attract foreign direct investment (FDI) in India.

These recommendations, although dealing with simpler issues, will impact a large number of taxpayers. Hence, their immediate implementation is important and essential. Some of the important aspects of the recommendations are those relating to Section 14A, Income Computation and Disclosure Standards (ICDS), Tax Deducted at Source (TDS) credits, assessment procedures, refund of taxes, etc.

The issue on classification of income from sale of shares as business income vis-a-vis capital gains seems to be well-addressed. The recommendations provide that, unless otherwise reported by the taxpayer, gains amounting to less than R5 lakh for shares held for less than 12 months and gains for shares held for more than 12 months would be treated as capital gains. The committee further suggests that the balance cases should be resolved on the basis of the judicial interpretation having regard to the facts of the case. The objective criteria recommended would help reduce litigation to a large extent; it would also reduce the burden on the taxpayer to prove the intention of holding the shares either as an investment or as stock-in-trade in several cases.

In addition, the committee has noted the areas of dispute in respect of Section 14A, dealing with expenditure incurred in relation to exempt income. It includes disallowance by the tax authorities without recording the basis of his satisfaction for applying the provision and quantum of disallowance at times exceeding the amount claimed as expenditure due to the artifice of normative/formulatory approach of Rule 8D. It also deals with disallowance of interest in cases where borrowing may not have been used to make investments earning exempt income. The proposal for amending Section 14A and addressing the above issues is a welcome move, as it ensures that the tax authorities do not mechanically apply Rule 8D, which is the bone of contention in most cases.

The committee, in light of decisions taken by a few courts—such as that of the Delhi High Court in the Cheminvest case—may also look into the issue of disallowance of expenditure in cases where no exempt income is earned during the year, as this would eliminate unnecessary litigation in this matter completely.

The recommendation to defer ICDS is another refreshingly welcome suggestion, since it allows all the stakeholders to analyse the impact of the proposed rules before their implementation. The suggestion also indicates a fair outlook of the committee on this issue, in the background of the impending report of the expert committee constituted by the Central Board of Direct Taxes (CBDT) to clarify certain aspects of their implementation.
The suggestion to reduce the incidence on non-residents where the Permanent Account Number (PAN) is not available is another prudent move, considering that the deductibility of TDS at higher rates increases the cost of doing business in India. The committee has recommended that the unique Tax Identification Numbers (TIN) of non-residents from their country of residence should be sufficient compliance, which is an appropriate step, considering that the identification of such taxpayers could also now be verified through Exchange of Information agreements being entered into by the Indian government.

The suggestion to simplify the procedure for claiming the credit of TDS will provide much relief and cheer to taxpayers. By proposing an alternative to over-reliance on the deductor revising his TDS return, the committee has paved the way for a smoother procedure for claiming the credit. Its implementation, along with that for ease of transfer of TDS credit to the resulting company in a demerger or restructuring, would help substantially reduce the headache caused during the filing of tax returns and during assessments.

The other recommendations of ensuring timely refund of tax by the authorities and increase in rate of interest on the said refunds, allowing fresh claim for expenditure or deduction during assessment proceedings, disallowing the reopening or reassessment of cases wherein an audit objection has been raised, and streamlining the process of recovery of demand in disputed cases are also welcome.

The report indicates a refreshingly strong focus on reducing the undue hardships faced by taxpayers without impacting the tax base or revenue collections. The recommendations, if implemented in letter and spirit, would bridge the communication and trust gap between the tax authorities and taxpayers, and would enable the objective of ease of doing business in India. A proper implementation would also send out a strong message that India is ready to shed its tag of ‘land of tax litigation’ and is becoming a truly investor-friendly nation.

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