While the litigation tentacle is very gripping, the TDS tentacle is long enough to freeze bank accounts of the deductor even though he is not a taxpayer and no amount is due from him. This is third part of a multi-part series
Let me give an example of how the delay undermines the system. Clubs are considered to be mutual societies, which cannot make income from their own members. However, when they deposit their surplus funds in the bank, the question is whether the interest is mutual income not liable to tax. Though it is not derived directly from the members, the Supreme Court held 5 February 1998 in the Cawnpore Club case that parking surplus funds in the bank is also a mutual activity and that such interest cannot be taxed.
However, the income tax officer refused to follow it and taxed the interest in the Secunderabad Club case and surprisingly it was upheld by the AP High Court. The appeal is pending in the Supreme Court. While so, the Supreme Court has held otherwise in the Bangalore Club case on 14 January 2013 without reference to the earlier case.
If only the case of the Secunderabad Club had been taken up earlier, there would have been no problem, but now they have to reconcile two judgments of the Supreme Court to get relief, which other clubs enjoyed till now. Similarly, the prohibition against filing a suit by the real owner against the benamidar was originally held to be retrospective but later held to be prospective. Many litigants whose cases were heard in between lost their cases.
The Income Tax department is yet to become a learning organisation. The department should have told the officers in the field about the decision of the Supreme Court in Cawnpore Club case and instructed them to exempt interest in all club cases, to avoid such repeated litigation. Even though the officers have access to decisions and also whether they have been accepted, the information is not shared with the taxpayers and so litigation is not curbed. The litigation tentacle is very gripping.
Besides, there are also administrative pressures. In a letter dated 7 February 2012 the chairman of the Central Board of Direct Taxes (CBDT) told senior officials that their career prospects would depend on their success in meeting targets for tax collection, emphasising the government’s desperation to raise revenues to plug the rising fiscal deficit. He sent out a clear message to the top 100 officials that tax revenue targets are ‘non-negotiable’. In one of the recent tax terror cases, a transfer-pricing related issue involving Bharti Airtel, the income-tax officer disallowed a sum of Rs57,39,60,05,089 (to make it simple for you—it means Rs5,739 crore!). This was done, despite the fact that it was obvious that there was no justification for such a disallowance
. These disruptions may even kill the goose that lays the golden egg.
Mauling the Messengers
The real sting of the present system is the deduction of tax at source. This is a job of the department to collect tax, which is quietly outsourced to the employers and others who need to make some payment. They have to deduct the tax due on the payment, file a return with the department and give a certificate to the payee. And unlike the income tax officer, they can be punished for not doing that work!
( section 271C)
In para 2.14.3 of the Report No8 of 2007, it is stated that the amount refunded out of tax deducted at source (TDS) was about 15% indicating that tax was deducted even where it was not required. A more poignant situation is when tax is deducted, though the person has no taxable income
. This tentacle is long enough to freeze the bank accounts of the deductor even though he is not the taxpayer and no amount is due from him.
Present Approaches to Change
Various committees have given reports about simplifying the system. But almost all of them were suggesting only ad hoc changes, very often, to get over judicial decisions which were considered to be road blocks.
• Direct Tax Code
was proposed as a substitute but it is only a restatement of the Income Tax Act with departmental bias.
• Shome Committee Report
has recently recommended some changes and surprisingly could not get the courage to recommend the repeal of a needless retrospective legislation. All the recommendations are for fine-
tuning the present sections of the Act.
Sometimes public comment is invited. But the comment has to be on the proposals and no fresh ideas are welcomed
. The recommendations that have been accepted do not deal with alternate methods of levy and collection of tax. In addition, data available with the department is not shared.
Action Point 1 of the Vision statement of the I-T department is, “Set up a research unit having a multi-disciplinary team coordinating efforts on tax research as an ongoing program, after ascertaining all the research requirements of I-T Dept.” Nevertheless, none of the data collected by them is put in the public domain. The CAG report No. 8 of 2007
gives the number of returns processed but we do not know how many were by salaried employees and how many were government servants or how many were self-employed. We do not know how many were high net worth individuals (HNIs) and what their profile was.
Vision for the Future
The perspective of the Government is not the same as the perception of the citizen. The vision of the Income Tax Department
is stated to be a partner in the nation building process through progressive tax policy, efficient and effective tax administration and improved voluntary compliance. Government thus looks at it as resource mobilisation. But the tax administration looks at it as tax collection process from unwilling taxpayers.
Oliver Wendell Holmes, Jr., US Supreme Court Justice said, "Taxes are what we pay for civilized society.” However, most citizens look at it as extortion or getting robbed of their hard-earned income.
Robert A Heinlein observed, “The power to tax is the power to destroy.”
John Marshall said “Government! Three fourths parasitic and the other fourth stupid fumbling.”
Terry Pratchett declared in Night Watch “Taxation is just a sophisticated way of demanding money with menaces.”
Murray N. Rothbard: “Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.”
This dissonance in the perception of taxation is the cause of friction in the administration of the tax regime. If we can change the mindset to be harmonious and identical, there will be clearer focus and easier administration. The way to do it is to understand that taxation is only a means to channelise the private funds of citizens for public purposes. This is not a new concept and is found in our ancient scriptures. "It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" Kalidasa in Raghuvamsam
eulogizing King Dilipa. Kautilya also recommended growth-oriented fiscal policy along with a provision of a safety net. Interestingly, another Rangarajan has motivated research
on this aspect.
(This is third part of a multi-part series on the vexing Indian tax system and the path to genuine reforms, adapted from Justice S Rangarajan Memorial Lecture in Bangalore delivered recently)
On Monday: Part4 - Redefining What to Tax
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(Justice TNC Rangarajan is a former judge of Madras and Andhra Pradesh High Courts. Earlier, for more than 20 years, he was a Judicial Member of Income Tax Appellate Tribunal.