Merck agreeing to a $2.3-billion settlement of a tax dispute with the IRS (the US Internal Revenue Service) is top news for the week, in the realm of tax rows. Closer home, the taxman seems to be gunning for sums that make the Merck settlement seem tiny.
One learns from press reports that the Tax Department has raised a demand of Rs 60,000 crore on completion of assessments for the returns filed for the financial year ended March 31, 2004. Set against the total corporate tax budget for 2006-07 of Rs 1,20,000 crore, the latest development has raised many an eyebrow.
"Given the fact that only a miniscule portion of returns is picked up for detailed audit, the quantum of the demand raised indicates huge potential loss of revenue to the department," says Mr Ajay Kumar, Executive Director, PricewaterhouseCoopers, in an interaction with Business Line.
Excerpts from an interview:
The size of tax demands is daunting. And these demands are raised on completion of the assessments of the return filed by the taxpayers. Why such tall demands?
The reasons are quite simple. It is not that taxpayers are cheats or are ignorant of the laws. Or, that the tax officers are overzealous in doing their duty. The crux of the problem lies with our laws. The legislature makes the law, the executive implements the same and the judiciary addresses the disputes. `Garbage in garbage out' principle applies to all systems, including our fiscal system. If the legislature does not take effort in drafting the law properly and educating the public at large, neither will the executive be able to implement the law nor will the subjects have the confidence in the system. The end result is there for all to see the tax collection officers, the judiciary and the tax attorneys are all extremely busy. This is the unhealthiest part of our fiscal system.
Are simpler laws the solution, therefore?
It is nobody's case that the lawmakers should make laws for every possible situation. It's not possible. However, at the same time, it is important to understand that a simple law does not necessarily mean a shorter piece of legislation. If simplistic laws are framed on the basis of a one-scale-fits-all approach, it will bring in inequity. The need of the hour is follow a different approach. To the extent possible the law-makers should keep a tab on the developments in our economy, circulate the draft legislation before implementing the same, involve those who have to follow it, have a healthy debate and then finalise. The public awareness and involvement will address a large number of potential problems. Swapping the time currently spent on making tax laws and the time spent in tax audit process the next couple of years, would go a long way in reducing work for the judiciary.
Isn't the annual Budget an instrument to make the required changes?
There are three major types of amendments that I have seen happening over the last couple of years: a) introduction of a variety of schemes, such as sale-and-lease-back transactions, converting tax-free dividends into losses, etc., for strengthening the tax provisions and plug revenue leakages; b) tax holidays and incentives; and c) improving the collection and administration system.
If you analyse the pre-Budget memoranda submitted by industry chambers, the focus is primarily on tax incentives and provisions that improve the post-tax return on investments. The business fraternity is not aware of the future of the fiscal system, that is, whether tax incentives will stay, be taken away, what the phase-out plan will be, etc. What I am referring is a paradigm shift.
Rather than adopt a cherry-picking approach, such as making amendments to the law to beat a favourable Supreme Court judgment, the need is to undertake a proactive approach. Globally, boundaries are melting, new business models are being conceptualised, and global businesses are being bought over. The Government needs to evolve a comprehensive tax policy in these areas. Allowing tax officers to impose and assess taxes on the basis on historical tax principles will result in unwanted litigation. Our tax laws cannot afford to be primitive in design and coverage. Our businesses have to compete with global players. For example, the Tata-Corus deal wouldn't have materialised in an archaic tax system. To illustrate, there is a huge disincentive for any outbound investor to bring his overseas earnings into India because of the unfriendly tax system.
Can the tax administration be more helpful?
The legal disputes can, perhaps, be addressed through transparent, well-elucidated tax laws. But when it comes to disputes relating to facts, the current system of auditing the returns is very subjective with a lot of power vesting in the officers, which run the risk of getting exercised in an arbitrary manner. The whole process of having personal attendance of the taxpayer or his representative should be abolished. Only in cases involving complex transactions or in recording the statement of an official of the company should personal attendance be insisted.
Clear instructions should be given to the assessee about the information needed. The Tax Department does have knowledge of the areas where potential leakages can happen. Framing a set of audit procedures for those areas and making the public aware of them are not daunting tasks. Such measures will not only shorten the audit completion process but will also reduce corruption. The tax officials will become more accountable and better prepared to address the CAG's observations. It is a win-win situation for all. The current move of digitisation of tax return is welcome, but a lot more needs to be done.
Any other measures that can reduce ambiguity in the tax system?
In respect of grey areas, Indian companies should have an option to get the ruling in advance. Currently, such an option exists only for non-residents. Rather than the historical approach of audit process, a concurrent audit process could be introduced. For example, the Government could as for prior intimation for certain sensitive transactions. This will allow quick identification of areas needing attention of the legislature or the executive.
In big cases, the Commissioner (Appeals) office, which becomes active after an assessment is framed, should get involved at the hearing stage itself, and address the dispute before its arises. Another area that needs to be revamped is international taxation. The legislature should decide to what extent it wants to follow internationally-accepted rules of interpretation of tax treaties and transfer pricing methodologies. It must then make its stand public. Ambiguity does not help anybody.