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Budget expectations for changes in tax rules
June, 05th 2014

With the new government having come to power on a manifesto promising less government interference and better services to the public, the expectations from the public regarding tax changes in the forthcoming budget are running high. While many taxpayers are clamouring for an increase in the basic tax exemption to offset the impact of inflation, there are other far more vexatious provisions that the new government needs to reconsider. While most of these provisions pertain to businesses, such as domestic transfer pricing, taxation of premium received on issue of shares, retrospective amendments regarding indirect transfer of shares by foreign companies, and others, there are a few provisions that result in harassment of the common man.

One such provision relates to taxation of the difference between the stamp duty valuation and the actual purchase price of an immovable property, as the income of the purchaser. This provision effectively presumes that the purchaser has paid black money if there is a difference of more than Rs.50,000 between these two values and, therefore, taxes the difference. In other words, it presumes that all taxpayers who acquire property at a lower price are tax evaders. It does not factor in the fact that a sale may be a distress sale, or that an adverse location or defective title of the property has depressed the value, besides various other factors which may have affected the valuation of the property.

Taxpayers have to go through the harassment of an assessment, a valuation by the departmental valuation officer and invariably end up in a series of appeals, involving substantial cost and tension, before they are able to prove that the price at which the property was purchased was genuinely the fair market price, which was lower than the stamp duty valuation.

Through another provision, section 50C, the seller also goes through the same harassment to ensure that she, too, is not taxed on the same difference. If the intention of the law is not to harass taxpayers, these sections need a relook.

The second big area of litigation faced by many individual taxpayers relates to the exemption for reinvestment of long-term capital gains in a residential house. Often, taxpayers buy more than one flat, which are adjacent to each other, to claim the exemption, and to facilitate any subsequent transfer of assets among their children. In such cases, they invariably face litigation from tax authorities, who claim that the benefit is available only for one flat since the law refers to acquisition of a house, even though the taxpayer may be using both the flats in a combined manner as one house for the entire family. Since the purpose of this exemption is to encourage construction and purchase of residential housing, there is no need for any restriction on the number of residential houses that a person may reinvest in to claim the capital gains exemption. A clarification is required in the law for this purpose.

The third and most significant area of harassment that taxpayers face is in relation to getting credit for taxes deducted at source and getting their tax refunds in time. The government has introduced a computerized system for grant of tax credit, and issued instructions to assessing officers to carry out rectifications. Yet, taxpayers are made to run from pillar to post to try and get full credit for tax deducted at source from their income. This is one area where, besides the law, the systems and procedures, too, need a thorough relook.

Taxpayers are promised refunds within four months under a Citizen’s Charter, but refunds are still withheld till beyond the end of the financial year, eight months later. Even then, many refunds are adjusted against fictitious demands, which the tax authorities ostensibly do not find time to correct. The government should either reduce the scope of tax deduction at source—which it has significantly expanded in the past few years—if it is not able to give credit for all such taxes collected, or it should give full credit in time.

We clearly need a fairer tax system, and not one in which there is no accountability of tax authorities, while taxpayers are made to run around and penalized for minor defaults. Tax officials, too, should be penalized for harassing taxpayers, so as to discourage such behaviour.

One hopes that the new finance minister will not only look at the amendments to be made in the law in the forthcoming budget, which will help businesses unleash their potential, but also provide some relief to harried taxpayers in the form of an improved tax administration.

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