Taxation
Will Tax Terrorism Rear Its Head Once Again?
The 2017 Budget was finance minister Arun Jaitley’s first to have received fairly positive reviews. Some experts have suggested that the absence of major negatives, or experimentation with taxation, is the biggest positive. However, there is a growing sense of anxiety among taxpayers and business about the unbridled powers granted to tax officials under the guise of going after black money. A sensible government ought to listen to voices of concern; but when its strongest supporters also turn critical, it needs to listen even more carefully. There is still time for corrective action; but, going by the post-Budget statements of the prime minister and senior bureaucrats of the finance ministry, the government is showing no signs of listening. 
 
The worry over amendments to the Income-Tax (I-T) Act unleashing tax terrorism have been repeatedly voiced by chartered accountants after the demonetisation exercise began on 8 November 2016; the Union Budget has only brought the fears out in the open more vociferously. Sushil Chandra, chairman of the central board of direct taxes, attempted to allay fears after the Budget by saying, “There is no need to fear, for any genuine person. We will ensure there is no harassment to genuine persons.” But nobody seems to believe these assurances—not even the government’s strong supporters.
 
The amendment to sub-sections (1) and (1A) of Section 132 of the I-T Act is one that had caused serious panic; it has a retrospective effect going back to 1962. It says that the tax officers will not have to disclose “to any person, authority or the Appellate Tribunal” why it has “reason to believe” that there has been tax evasion and there is a basis for ordering and conducting a search and seizure operation. Further, sub-section (1) of Section 132A provides that the tax authority, based on suspicion or ‘reason to believe’, can “requisition from some other officer or authority to deliver books of account, documents or assets of the assessee to the income tax authority so authorised.” This change will have retrospective effect going back to 1 October 1975.
 
It does not require much sagacity to know that tax-dodgers, whose evasion runs into hundreds of crores of rupees, are experts at fixing the system to their advantage. Draconian powers in the hands of tax officials are more likely to harass honest taxpayers by disallowing genuine expenditure. In line with the NDA (national democratic alliance) government’s distrust of NGOs, the Union Budget has also extended the power of the tax officials to conduct search and seizure operations of charitable institutions. This is worrying, because we know that it will quickly turn into a tool of control and harassment by the government. 
 
The amendments regarding search and seizure are specifically aimed at overturning case law where the judiciary had prevented fishing expeditions by tax officials based on mere suspicion, or simply to hound people. The amendments ensure that the judiciary will not be able to question arbitrary actions or raids by tax officials. 
 
Senior advocate and tax expert Soli Dastur, speaking at a post-Budget seminar in Mumbai, said that this amendment, which allows raids and searches without disclosing ‘reason to suspect’, interferes with a person’s privacy and it cannot be allowed to happen in a democratic country like India. 
 
Senior editor Minhaz Merchant, a huge supporter of the Narendra Modi government, calls this a change that is “straight out of Orwellian dystopia” in a fiery article for the website Daily O. He also points to another draconian amendment in the I-T Act that permits the assessing officer to order attachment of the assessee’s property for six months after obtaining sanction from a senior officer. Specifically, the amendment will allow tax authorities to provisionally attach the property of an assessee for six months, either at the time of search and seizure or up to 60 days from that date. At present, property can only be attached after an assessee’s request for stay on attachment is rejected by an  I-T commissioner. A person also gets 30 days to apply for a stay. This power was widely misused, even against small companies, even prior  to the empowering  new amendment. 
 
One can only guess at the enormous blackmail and capricious actions by tax officials that will be unleashed after some crucial checks and balances have been removed, in the name of raising revenues and going after the crooked. It gives assessing officers the power to reduce individuals to penury in one stroke and also shut down businesses by the sheer ferocity of their actions. Most people will not even have the resources to seek judicial redress in our excruciatingly slow and expensive judicial system. Mr Merchant believes that the PM, who is “instinctively against such abuse that amounts to tax terrorism,” should step in and correct the damage; but it is hard to believe that the changes in the Budget have been introduced by the finance minister or bureaucrats without the express consent of the PM.  
 
Mohandas Pai, investor and former CFO of Infosys Ltd, who is a diehard supporter of the Modi government and its policies, has also lashed out at the ‘draconian powers’ being given to  I-T authorities after demonetisation and warned that this would only increase corruption. In a recent public speech, he says that people “have voted the NDA to power to prevent tax terrorism, improve tax administration and reduce tax disputes.” He calls the NDA government’s past two-and-half years ‘disappointing’ in this regard because corruption has not decreased much, tax administration has only partially improved, but tax disputes have increased ‘massively’.
 
Speaking at the Budget session of parliament, PM Modi deflected criticism about the frequent policy changes in the demonetisation period, saying that the government was agile in reacting to the situation, whether it was to alleviate the hardship faced by people or to cut off attempts to convert tax-evaded cash. 
 
In that case, what was the need for even more draconian changes in the Budget? Speaking about such ill-thought out policy changes at a post-Budget discussion, Dr Arvind Virmani, former chief economic advisor at the finance ministry, correctly said, “There don’t seem to be enough tax policy experts in the government” who can think in a comprehensive manner. Dr Virmani says, income-tax is very complicated and you have to think of a multitude of “macro and micro socio-economic relationships” while working on tax reforms. Unleashing tax terrorism in pursuit of a “moralistic obsession with black money”, he believes, will end up with the government “ignoring real economic issues that need to change.”
 
Actually, I believe that Pratap Bhanu Mehta is on the dot when he says that “the clamour for security, accountability and transparency is leading to unfettered increase in the power of the State,” through laws and technology that will eventually give the government single-point control over every individual. Unfortunately, very few Indians seem to understand the scary significance of these changes and, those who do, can do little about it. 

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COMMENTS

vswami

4 months ago

Caution (given out of sheer compassion):
Not to gloss over, in the stride, Minhaz Merchant’ s cryptic critique of such development , of quite a serious nature, as one “straight out of Orwellian dystopia”.
For an intimate appreciation, recommend to look up:
https://genius.com/albums/George-orwell/Nineteen-eighty-four
Clue: “In this Genius edition of Orwell’s 1984 we break down the meaning and the importance of the enduring work, and get down to the root of the question, of whether we have managed to escape the nightmare Orwell so envisioned 66 years ago today.”
< “Ignorance Is Strength” –
That, at best, as is open to be gathered from wisdom gained in hindsight, is a vile illusion. However, the men in governance / the bureaucracy seem to believe in also have immense faith in that thing called ‘ignorance’; which, of course, is a commodity, forever free, in abundance.
Side Dish: http://www.thehindubusinessline.com/…/sa…/article9535236.ece

Kamal Garg

4 months ago

It is definitely draconian and nothing short of tax terrorism. This Govt is hell bent upon harassing citizens of this country who actually voted in their favour in 2014. Most of the acts of this Govt during the last less than 3 years are actually against the freedom of common citizens and harassment of common citizens. Look at demonetization. None of this objectives mentioned by PM in his speech on 8th Nov 2016 has been achieved except the horrendous harassment to common citizens of this country. Somebody told me that this is a "bhookhi-nangi" govt hell bent upon exercising a Hitler style of governance in this country. Common citizens are harassed every day in the name of so many tax related and non-tax related issues.

vswami

4 months ago

Sporadic jottings:
No doubt, 'terrorism' /-domestic- or cross border- terrorism, conceptually, is the most dreaded of all ; and has been, not just stray, but the common life- / place- experience for quite long now; and even in those very few once-upon-a-time peace-loving democracies ! Evidencing that , as largely realized, and conceded , 'evolution' of human being, so also of the thing called 'sanity', has not but been an ongoing process as ever !
Turning to specifics: (utterly, butterly) Common Sense Poser > Read through...- 'reason to suspect' ? In comparison, was 'reason to believe' - any better / or any less 'subjective' than... ?? Is Time up to re-frame- " 'discretion' is the better part of ...; or ... last refuge to ....???

Aditya

4 months ago

Well on the spot again from Money life ! This 'new' IT officers resemble to police in India which is toy for big shot and tormentor for less fortunate ones who do not enjoy that cult as former one do.Our economy already weakened by non-required demonetization should embrace to more job loss.It looks like current government has no road map for most of the policy and taking on the things as they come without much prudence or pondering.A huge scam like 2G does not hurt India much as its bureaucrats do.

SuchindranathAiyerS

4 months ago

Bhaskar Rao (I) is a classic example of Indian Governance. Unless those on public pay roll are held to account for performance and integrity. India will remain harassed. In one way or another.

Government needs to retrench three quarters of those on Public pay roll and cut down the laws and extortion to a point where a quarter of the staff will suffice. Then they need to abolish reservations and get tough on corruption make corruption an act of treason and a capital offence. Government needs to abolish all subsidies and pay a tax free monthly subsistence stipend to ALL citizens. Enabling people to work for more than just subsistence while maintaining equity and equality under law.


Above all, as I have frequently stated, nothing will change until:


(1) Inequality under law and exceptions to the rule of law (including “reservations” and special privileges for some religions at the expense of others) are expurgated from the Constitution and laws of India.


(2) Bribe Taking is defined as criminal extortion or treason and made a capital offense with special rules of evidence and special courts with summary powers (akin to a Military Court Martial).


(3) All court proceedings are video graphed and archived for public viewing and can be used as evidence to prosecute Judges and Magistrates at all levels under special laws and special courts with summary powers akin to a military Court Martial, for insouciance, negligence, tardiness, dereliction of duty, disregard for law and propriety, behaviour unbecoming of a Judge such as lack of etiquette and manners,


(4) every job on the "Public" i.e. Government Pay Roll has specific and unique Key Responsibility Areas, Key Performance Parameters and Objectives for which they are held accountable on pain of summary dismissal for non-performance or life imprisonment for treason for sabotage under special laws and special courts with summary powers akin to a military Court Martial and

(5) India creates an Ombudsman Service of reemployed and retrained military officers (Colonel and Below, JCOs and NCOs) who retire before 50 to serve as presiding officers, investigating/prosecuting and enforcement officers at the afore mentioned "Special Courts", one for every tehsil with powers to arrest, incarcerate, try and punish any and all from the President of India to a peon in accordance with the Special Laws framed therefor.

S A Narayan

4 months ago

Before this govt won the elections in 2014, many naysayers of the BJP had predicted certain fascist tendencies of the party and their leaders. Were they prophetic?

REPLY

Kamal Garg

In Reply to S A Narayan 4 months ago

Looks like. Prophets were correct this time. Hope they are proven wrong otherwise we are going in a very dangerous direction. "Economic emergency" is also akin to "political emergency" imposed by Indira Gandhi.

Ajay Tyagi New Sebi Chief
The government has decided to appoint Ajay Tyagi, Tyagi, additional secretary (investment) in the department of economic affairs of the finance ministry as the next chairman of the Securities of Exchange Board of India (Sebi). Tyagi was said to be among the three shortlisted for the job by Financial Sector Regulatory Appointments Search Committee (FSRASC), which conducted the interviews and short-listed the candidates. Two others in the running were said to be power secretary P.K. Pujari and Shaktikanta Das, economic affairs secretary. The process for selecting the next Sebi chief started in September. The current tenure of UK Sinha, who has been at the Sebi chief since February 2011, ends on 1 March. An IAS officer from Himachal Pradesh, Tyagi, for a short while was also on the RBI board.
 
Sinha became the Sebi chairman on 18 February 2011 and was initially appointed for a three-year term. Later, he was given a two-year extension. Last year, days before Sinha’s last term was to end on 17 February 2016, the government approved his re-appointment to the position from 18 February till 1 March 2017. The finance ministry while inviting applications for the Sebi chief post had mentioned “Keeping in view the role and importance of Sebi as a regulator, it is desirable that persons with high integrity, eminence and reputation preferably with more than 25 years of professional experience and in the age group of 50-60 years may apply.”
 

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Tax Provisions of Budget 2017 Decoded
"The important message this Budget sent to all of us is to go cashless," said Ameet Patel, a Chartered Accountant, who has been in practice for the past 30 years. He was analysing important and direct tax proposals in the Budget 2017 at a Moneylife Foundation seminar. This can be seen from some important provisions in tax to promote digital payments among businessmen. Not only revenue expenses but even depreciation will be disallowed on a capital asset if payment for that asset in excess of Rs10,000 is made in cash." 
 
The government has also put restrictions on cash payment of over Rs3 lakh under Section 269ST and 271DA in a in respect of a single transaction in a day. This provision is very widely defined. Mr Patel pointed out the applies to any person whether a taxpayer or not. It also applies to “one event or occasion from a person”. Therefore you cannot even break up the cash payment over several days if these all related to a single transaction such as paying money to a builder. You have to transact through an account payee cheque or a payee bank draft or use of electronic clearing system through a bank account. “While there are certain exemptions provided, if you contravene, then you will attract penalty of an amount equal to the amount received," he added. "In all the amendments, there is reference to 'electronic clearing system through a bank account, Mr Patel said, adding, "But it is not clear if credit card payments or payments through digital wallets be covered under this." 
 
Terming the demonetisation move as earthquake, Mr Patel feels its aftershock will be felt by those who have tried to misuse the cash deposit facility. "The Government has got massive amount of data, which is being analysed minutely. Cash deposits between 9 November 2016 and 30 December 2016 will attract a magnifying glass (from the tax sleuths). Data analytics has been used for comparison of demonetisation data with information in Income Tax Department databases to identify taxpayers wherein the cash transaction does not appear to be in line with the taxpayer’s profile. Inquiries have already been received by many depositors. The Pradhan Mantri Garib Kalyan Yojana is the last opportunity to come clean for those have not yet," he said.
 
Although the government gives sufficient time for filing tax returns, many taxpayers file returns after the due date. "In order to discourage late filing of returns (after due date) and to comply with the filing on time, a new section 234F has been inserted from 1 April 2017,” Mr Patel said, adding, “An additional fee will be levied if return of income is filed after the due date without reasonable cause. The additional fees will be Rs5,000 if the return is filed before 31st December of that assessment year and Rs10,000 in any other case. However, if the total income of the assesse does not cross Rs5 lakh, then the additional fees shall be restricted to Rs1,000."
 
In the Budget 2017, the government has made amendment in Section 44AD, where for presumptive taxation if turnover is received otherwise than by cash then the presumed profit will be 6% instead of 8%. However, this provision is not available for professionals covered under Section 44ADA, Mr Patel said.
 
Explaining Section 44AD, Mr Patel, who is partner at Manohar Chowdhry & Associates, a CA firm with 12 offices across the country, said, "If turnover does not exceed Rs2 crore, then profit is deemed to be 8% of the turnover. But if the profit is actually more than 8% then you have to declare the higher amount. If any part of turnover is received by account payee cheque or account payee bank draft or through electronic clearing system, then profit is deemed to be 6% of that turnover. But if the profit is actually more than 8% then you have to declare the higher amount. Even for business expenses paid in cash, the limit is reduced to Rs10,000 from Rs20,000 under Section 40A(3)".
 
 
Mr Patel then explained changes in tax rates for individuals proposed in the Budget. To grant some relief to taxpayers in the first slab (Rs2.50 lakh to Rs5 lakh), the tax rate of 10% is now reduced to 5% from FY2017-18.
 
 
"Under Section 87A, a rebate of up to Rs5,000 is allowed if total income does not exceed Rs5 lakh. In effect, for income up to Rs3 lakh, there would be no tax. However, in line with lowering of income tax slab rate for the first slab, the rebate has been lowered to Rs2,500 for the individual resident having income up to Rs3.50 lakh in a year," Mr Patel added.
 
There is a new single page income tax return (ITR) form for those with income less than Rs5 lakh from income other than business or profession. In such cases, Mr Patel said, there would be no assessment or scrutiny for first tax return filed unless any specific information is received by the income-tax department against such person. He quipped: “I don’t know how many first time investors come under scruiny anyway.”
 
In the Budget, the government has made more people to pay surcharge, including individuals, Hindu undivided family (HUF), association of persons (AOP), body of individuals (BOI), artificial juridical person (AJP), who will be subject to a surcharge of 10% of the tax for having income above Rs50 lakh but less than Rs1 crore. Earlier, the surcharge was payable by all these for income over Rs1 crore.
 
Mr Patel then talked about new changes in income from house property. He said, "Many builders do not offer tax on notional income from the unoccupied, or unsold flats and godowns, which are held as stock in trade. However, tax department used to treat the same as notional income and charge it to tax. In order to provide some relief to the developers and boost the real estate sector, Section 23 will be amended from 1 April 2017."
 
 
The amendment says, where any house property is held as stock in trade and is not let out for whole of the previous year or any part, “then the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil."
 
In addition, there is a change in the definition of long-term capital asset for immovable property. The holding period for immovable assets, or land and building reduced to 24 months from present 36 months. "Hence, when you sell any house property, land, flat, building or godown, or in other words, any immovable property, if the same is held for more than 24 months, then the same shall be classified as a long term capital asset and it will be taxable as long term capital gains (LTCG)," Mr Patel said.
 
The government has also shifted the base year for indexation benefits to FY2001-02 from FY1981-82. Explaining the benefits of this move, Mr Patel said, "If asset is acquired prior to 1 April 2001, then you can substitute the actual cost with the fair market value (FMV) as on 1 April 2001. New Cost Inflation Index will be announced now from next year. Cost of improvement incurred on or after 1 April 2001 will also be allowed as a deduction."
 
 
"While the government will now allow entities other than National Highways Authority of India (NHAI) and Rural Electrification Corp (REC) to issue Capital Gains Bonds for exemption under Section 54EC, the overall limit for this has remained at Rs50 lakh," Mr Patel said.
 
He then explained new provisions in charging capital gains for cases like joint development agreement (JDA). He says, "Currently, in case of JDAs, the capital gains is charged in the year of such transfer of rights and not in the year when legal title is transferred. This was causing a huge problem in the JDA entered by the owner of land or property with the developer. Now, when the owner is an individual or HUF who enters into a JDA, the capital gains shall be chargeable to tax in the year in which certificate of completion for the whole or part of the project is issued by competent authority. If share in project is sold before completion, then new provision will not apply.”
 
In the Budget, the government has proposed to introduce a new section 194IB from 1 June 2017 for tax deduction at source (TDS) on rents. "Individual or HUF who is not liable to tax audit under Section 44AB and pays rent to a resident in excess of Rs50,000 per month or part of the month shall be liable to deduct TDS at 5% on such income payable to the payee. In addition, provisions of section 206AA shall be applicable if the payee does not have a PAN (i.e. 20% TDS). TDS shall be deducted only on the last day of the previous month or in the month in which the tenancy ends if the property is vacated. Personal use of the rented property will also attract TDS," Mr Patel added. This is a draconian provision because it will apply to even cases like hall rented by a lower-middle class family for marriage. They would be liable to deduct tax and deposit. “This is not a workable provision. I think it will be amended or it will fail.”
 
Mr Patel also explained the capital gains treatment given for conversion of preference shares into equity shares. "As per the Budget 2017, conversion of preference share of a company into its equity share shall not be regarded as transfer. Therefore, there will be no capital gains at the time of conversion of preference shares into equity shares. Cost and date of acquisition of preference shares will be cost and date of acquisition of the equity shares," he said.
 

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COMMENTS

S BHASKARA NARAYANA

3 months ago

Ultimately, no person having income less than rs. 25000 pm can get immunity with just rs. 210 pm. Am I correct?

Suketu Shah

4 months ago

One of the most understated positives is penalty to CA for false declaration.NaMo and PMO office is realising that majority of frauds are the handiwork of fraud and cheat CA's(not of clients) which are significant in proportion and earning their money via fraudulent means during the past Congress era,now over."Ache Din" have truly started.

Shirish Sadanand Shanbhag

4 months ago

Comprehensive knowledge on the budget by CA Ameet Patel.
Thank you, Moneylife Foundation, for an immediate release of the report on such an important topic.

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