Various finance ministers in India have from time to time expressed their desire to simplify the income-tax law. The Direct Taxes Code (DTC) was also originally meant to simplify tax laws, but will probably end up complicating the law even more. The recent budget proposals in respect of income-tax will also end up complicating the tax laws, giving rise to more loopholes and litigation. Is simplification of tax laws ever possible in the Indian context?
One has to remember that when one talks of simplification of tax laws, the law may be easy to understand, but a simple law would have standard one-size-fits-all type of provisions. Since such standard provisions would apply to all types of taxpayers, irrespective of their complex situations, it will obviously result in inequity to many. Therefore, in the process of a simple law, some taxpayers may benefit, whereas some may lose out. Very often, the complexity in tax laws arises out of the need to ensure that a significant portion of taxpayers are not adversely affected by an inequitable provision. The vocal demands of various sections of taxpayers and the pulls and pressures that they exert obviously result in the government enacting complicated tax provisions to suit various types of taxpayers.
Shyamal Banerjeee/Mint However, most of the complicated provisions seem to arise due to the efforts of the tax authorities to plug the loopholes they notice. In fact, when one reads the DTC provisions or the recent budget proposals, it appears that these proposals have been drafted after going through almost all court or tribunal decisions, which have been decided against the income-tax department and trying to find a solution to overcome the ratio of these decisions. Such an attitude results in almost 100 amendments to the tax laws each year and has significant negative impact on businesses since stable tax laws is one of the prime requisites for a favourable business climate. Nani Palkhivala often referred to the Income-tax Act as a national disgrace, being the most amended law in the world. Possibly the only time that we had some stability in our tax laws in recent years (as recent as 1985) was when V.P. Singh, as the finance minister, introduced the concept of a long-term fiscal policy. That policy has now been long forgotten and the term long-term in respect of our tax laws would now imply a period of not more than 12 months.
The other reason for complication of our tax laws is the unfortunate attitude of the tax authorities to lay down so many conditions in order to grant a small deduction or exemption that it really ends up being availed of by too few taxpayers to make it worthwhile. A classic example is the recently proposed exemption for long-term capital gains contained in section 54GB.
In order to get the benefit of exemption on long-term capital gains on sale of residential property, the conditions are that the net consideration from the sale of the property has to be invested in the equity shares of a newly formed company within the specified time limit, the company has to qualify as a small or medium enterprise, the company has to be engaged in the business of manufacture of an article or thing, the taxpayer has to own at least 50% of the voting power of the company, the company has to acquire a new plant and machinery within the prescribed time, the shares or the new plant and machinery cannot be transferred for a period of five years and so on. There are of course further conditions as to what type of plant and machinery does not qualify, among others.
Given these complicated conditions, would you not be surprised that few taxpayers would ever qualify for such an exemption? Why have such a complicated exemption at all, which would benefit just a handful of taxpayers? And that too, with the DTC supposedly just around the corner, which seeks to eliminate and reduce exemptions.
Unfortunately, the proposals for direct tax amendments emanate from the tax department and each year a short-sighted view is taken of the tax amendments, depending upon the immediate exigencies of tax collection to meet revenue targets and projected tax growth rates. The need of the hour is perhaps some amount of simplification, but more rationalization. What we really need is a comprehensive review of our tax laws and framing of a long-term tax policy by an independent body, drafting of a new balanced tax law by a panel of experts (and not just representatives of the tax department) after taking into consideration the feedback from taxpayers as well as the tax department, followed by a blanket ban on amendments to the tax laws for a period of at least five years. Probably this is just wishful thinking, which may not ever materialise during any of our lifetimes. I would love to be proved wrong on this.