Misreporting or underreporting? Between taxpayer and tax collector, the question could become one of more than mere semantics.

In his February 29 Budget, Finance Minister Arun Jaitley proposed a change in rule aimed at reducing litigation and increasing transparency. But this could end up having the opposite effect, said some experts.

If a company differs with the tax officer over calculating tax, the latter can take a call on whether the move was bonafide or malafide in nature. He can then decide whether to levy a fine of 50 per cent or 200 per cent depending on this.

While the proposed change is meant to aid transparency, it could mean more fines for taxpayers and eventually more litigation, the experts said. "As per the budget proposals, even if the taxpayer has disclosed all the information but has made a genuine mistake in taking a tax benefit, the tax department could arguably levy a 50 per cent penalty," said Rajesh H Gandhi, partner, tax, Deloitte Haskins & Sells. "This is different from the current provisions where penalty can be levied only if the taxpayer has concealed his income or furnished inaccurate particulars of income relying on a Supreme Court ruling."

For instance, a company may declare that its income is Rs 250 but the tax needs only to be paid on Rs 200 as Rs 50 is exempt. However, the tax official may hold that total income is Rs 250 and that tax must be paid on the whole amount. In the normal course, both parties would have gone to court to determine how much tax is payable.
Budget 2016: Two-point tax scale may tilt against taxpayers, say experts

The Budget proposal will mean tax officials judging the intent behind the company's "not showing". Rs 50 as taxable. Depending on this intent, whether it was deliberate deception or not, the penalty could be either 50 per cent or 200 per cent. This is where disputes would arise. "While taxpayers can claim there was a bonafide reason for the mistake, accepting the claim will be left to the judgment of the tax officer," said Gandhi. "Hence, to that extent, penalties could go up resulting in litigation."

To be sure, the Narendra Modi government has been at pains to pledge an end to what it has called tax terrorism as it looks to attract investors to shore up economic growth. Currently, penalties seldom exceed 100 per cent but it could easily be twice that under the proposed regime, experts said. This has created a scare in the minds of the taxpayers.

"The earlier range of penalty that the tax department could impose (i.e. from 100 per cent to 300 per cent of the incremental tax liability) has now been shifted to a two-point scale, that is, 50 per cent for under-reporting of income and 200 per cent for misreporting of income," said Frank D'Souza, partner, PwC. "One of the issues that can arise from this is that, given the potential disputes on interpretation between underreporting and misreporting, are we now going to see penalties being levied at 200 per cent?"

Tax experts are also wondering about the effective date of implementation.