Tax policy: Separating collection & policy-making will benefit both CBDT & taxpayer
September, 16th 2010
THE Central Board of Direct Taxes (CBDT), constituted under the Central Boards of Revenue Act, 1963, is an all-powerful apex body for the direct tax administration in the country. Its function is not merely restricted to ensuring administration of tax collection, but also to clarify and relax the rigours of the provisions of the Income-Tax Act, 1961 (the Act), to alleviate practical difficulties in the interpretation of law.
This is an intriguing fusion of being incharge of tax collection, where there is an invisible pressure on the CBDT to meet the ever-growing revenue targets of the government and, at the same time, being responsible for relaxing provisions, which approximates to benefitting the taxpayer. Certain CBDT dictates in the past have lead people to believe that this inherent conflict has at times coloured the thinking since the administrator is seen as driven by tax collection targets than removing the rigour of tax. The notifications issued by the CBDT being binding on the tax officials assumes significance. At the same time, checks and balances are built, by providing that the CBDT cannot issue directions or instructions to an officer or appellate authorities that could intrude in their day-to-day functioning.
From a distance, this fusion appears incompatible and contradictory and, hence, the argument for separating the powers and responsibilities of the CBDT has been a matter of debate in successive tax reforms committees. The original Direct Taxes Code (DTC) Bill placed for public review last year removed the powers of the CBDT to relax the rigours of the Act, but the revised DTC introduced in Parliament has restored those powers ostensibly since the IRS lobby was displeased and expressed its disapproval to the finance minister.
In the past, the CBDT had performed a host of functions including extension of time limit for filing returns considering circumstances (such as natural calamities etc), order to admit belated claims for incentives and refunds, waiver of interest levy, fixing monetary limits for filing appeals by the Revenue to avoid frivolous appeals and so on. Clearly, the functions are laudable and without such statutory powers under delegated legislation, the tax administration would be inflexible and merely rule-bound. Undoubtedly, CBDT could not have responded to such emerging situation with swiftness and respond maturely.
However, the point of view about the incompatible nature of the function of the CBDT cannot be ignored. Certain circulars have come under criticism that some clarifications they provided went beyond the mandate to provide relief to the taxpayer and, instead, acted as new laws. An example is the fringe benefit tax (FBT) regime where, at the inception of the regime, CBDT circular clarified over 100 situations for the levy. A wider consensus in the taxpayer community and professional fraternity was that most clarifications bordered on creating a new law beyond the intent of the statute.
The DTC is poised to bring new General-Anti Avoidance Rules (Gaar) empowering the commissioners of income-tax with the authority to label a transaction as tax avoidance and disregard the form by applying the economic substance test. This is a far-reaching provision that causes concerns of taxpayers in India and abroad. The revised DTC fixes the responsibility on the CBDT to issue guidelines to provide circumstances under which the Gaar may be invoked.
Two questions arise out of such delegated powers: one, is such exercise approximating to law-making itself? Secondly, why should a further contradiction be created in the role of the CBDT, in the sense that, Gaar is an important tool for revenue officers to penetrate tax-avoidance schemes for enhancing tax revenues and why should the apex administration be responsible for laying down the manner of using such provisions?
Where does the blame lie? Successive governments have not been able to contain the profligate machinery. The pressure on the revenue administration to collect more taxes every year compromises the independence and objectivity of the administrator. The menace of retrospective amendments to upset rulings of the courts government being the largest tax litigator creates an environment where the CBDT would find it progressively difficult to maintain equanimity.
Over the decades, CBDT has maintained its balance between revenue collection and allowing relief to the taxpayer, with some exceptions, which are natural for an institution. This has been possible due to exemplary IRS officers who have lead the institution.
Enactment of DTC is the right time for engaging in a broader debate to separate the administrative powers acting as a tax collection agency and ability to provide relief to taxpayers, an important constituent of taxpayer service, notwithstanding the emotions of IRS officials who opposed the initial DTC provisions.
A separation would ensure that each functionary would pursue its stated objective and there is limited scope for inherent contradiction between tax policy and tax administration given the importance of raising revenue collections.
We have an opportunity to learn from international best practices to create a taxpayer-friendly environment, administering tax collections and overseeing strategic objectives such as tax policy and creation of machinery to deal with complex issues such as treaty negotiations, settlement of disputes under the treaties etc.
This can all be accomplished not just with allocation of role and responsibility, but by creating autonomous independent bodies with in the framework of the ministry of finance.