Economy

Futile efforts

Frequent short-term committees, with hurriedly conceived terms of
reference, have not reformed the income tax law

THE culture of constituting short-term committees for changing the income tax law of the country seems to have become a past time with finance ministers. In the past few years, there have been umpteen decisions to appoint committees/tax panels to amend the income tax law. The most recent has been the announcement by Finance Minister Arun Jaitley, on October 27, 2015, of setting up a panel, headed by a retired judge of the High Court and nine members, for reviewing the Income Tax Act, 1961. Its duration is one year and it has to submit its first interim report by January 31, 2016, so that the acceptable suggestions can be included in the Finance Act.

The objective for setting up a new committee for changing the Act has been explained by the Finance Minister saying that “…time has come to look at some provisions of the IT Act to look at how their drafting quality can be improved in order to avoid ambiguity so that everybody is certain as to what the Act is…”

However, despite so many committees and expert panels, the IT law continues to remain complex, litigation prone, unstable, lacking in attributes like neutrality, revenue elasticity and similar qualities that tax laws need to possess. This has been because of the ad hoc nature of decisions for appointing such bodies without serious homework to frame the ‘terms of reference’ and inadequate time given to such bodies for completing their work. The main responsibility for this can be placed on PC Chidambaram, the former Finance Minister, who wasted nearly two decades (barring six years of the Atal Biahari Vajpayee government) not amending the IT law. But his efforts backfired because of deficiencies in his decision-making and the bodies chosen were improperly constituted, mandates to them were vague and time for submitting the report was unduly short.

Despite so many committees and expert panels, the IT law
continues to remain complex, litigation prone, unstable, lacking in
attributes like neutrality, revenue elasticity and similar qualities that tax
laws need to possess

The committee appointed in 1996 by Chidambaram to amend the income tax law and give a new code was merely given a general mandate ‘to examine the existing Income Tax Act and to suggest changes that have become necessary, particularly in the light of the new economic policy and reforms’. The committee (which comprised mainly IT Department officers) was given only five months (later extended by two months) to complete the task and give a draft of the new Act (which too was done in another few months). Obviously, the exercise was impromptu, done by a body which was not equipped with varied expertise and became a waste. In his second term as Finance Minister from 2004, Chidambaram did not appoint a formal body to amend the IT law and got it done through IT Department officers under his guidance. They, directly, without a report, produced DTC, 2009, which was severely criticised and his successor, Pranab Mukherjee ordered a re-look at the 2009 draft, which was replaced by the 2010 code, which too dragged on and has ultimately been junked by Arun Jaitley, who has chosen to appoint a new committee, as stated earlier.

Compared to the in-house committees appointed by Chidambaram for DTC, the new committee comprises independent members from different disciplines. However, a 10-member committee was not necessary, as it can create bottlenecks in working. It could have comprised five-six members. The terms of reference for the new Committee read as:

  • Study and identify the provisions/phrases in the Act that lead to litigation due to different interpretations.
  • Study and identify the provisions which are impacting the ease of doing business.
  • Study and identify the areas and provisions of the Act for simplification in the light of the existing jurisprudence.
  • Make recommendations to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection.

EVEN here, the terms of reference are not comprehensive and cover limited areas. There are still very many areas which need consideration to avoid another committee and piecemeal legislation.

Making of tax reforms cannot be a hurried and ad hoc exercise through inept
reform bodies of short-term duration with general terms of reference.
It has to be a consolidated approach for improving the working
of tax laws for a long-term application

The new attempt, though better than past decisions, still ignores some basic aspects. Here too, proper homework has not been done and the basic exercise, which is necessary before initiating any exercise for tax reforms—what is sought to be achieved; how it is proposed to be achieved (which would include taking care of implementational aspects also); what would be the reaction of the reforms in the existing social, economic and political set-up—has not been done.

The proposals are to be balanced in the background of four rules—Rule of Results, Rule of Relevance, Rule of Robustness and Rule of Resilience. Regretfully, such aspects have not been considered before appointing the committee and drafting its terms of reference.

The Minister, in appointing the new committee, does not seem to have benefitted from past failures. In taking decisions regarding the new body and terms of reference, only some peripheral changes have been considered, ignoring the factors that led to past failures. The most important amongst these has been mixing of short-term objectives with long-term ones. Tax reforms need to be handled with two-phased approach. For short-term issues, needing early solutions, short-term committees/panels can be appointed for these on the lines of Justice AP Shah Committee, appointed recently to review the provisions relating to Minimum Alternate Tax (MAT) on foreign portfolio investors. Based on the recommendations of this panel, the government has successfully closed the issue and the law to implement the decision will be amended by the Finance Act, 2016.

Long-term changes, inter-alia, could be said to be those which affect the basic structure of the Act, such as bringing in new concepts not hitherto tried, inclusion in the Act of the provisions which deviate from the generally accepted concepts like deeming certain receipts as income when it is not so in common understanding, introduction of provisions in the Act, which lead to sacrifice of tax revenue in order to achieve some non-tax objective such as for encouraging exports, change in law concerning searches and seizure, and so on. For long-term changes, a separate committee, with detailed terms of reference with a longer period for submitting the report, needs to be constituted. Or, this could be referred to the Law Commission of India for its report as was done when the present Act was drafted.

Making of tax reforms cannot be a hurried and ad hoc exercise through inept reform bodies of short-term durations with general terms of reference. It has to be a consolidated approach for improving the working of tax laws for a long-term application, inter-alia, for the economy of the country and provide finances for achieving the government’s overall goals. For this, the prerequisites are political will and clarity regarding the purpose.

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