What is the electoral bond doing in the new income tax bill?
Tax litigation will not come down unless tax officials are assured that they would not be penalised for causing loss to the exchequer by not raising maximalist demands on assessees
What is the electoral bond doing in the new income tax bill?
Apart from the intriguing retention of the electoral bond in the new income tax bill's provisions, a troubling feature of the bill is the absence of any provision to reassure tax officers that they would not face charges of causing loss to the exchequer on failure to adopt maximalist claims on assesses
What is the electoral bond, outlawed by the Supreme Court, doing in the draft of the new income tax code proposed by the government? Does the government propose to reintroduce the electoral bond in a different form? Schedule VIII of the bill introduced in Parliament, dealing with income not to be included in the total income of political parties and electoral trusts, exempts contributions received in the form of electoral bonds from taxable income.
If it is meant only to apply to past accounting periods when the electoral bond was a valid instrument, why does the new code not say so?
The essential purpose of the new income tax bill is not to radically reimagine incomes or rates or tax liability. Its purported purpose is to shorten the Act, remove redundant sections, explanations and provisos, and simplify the language of the law. In this light, the presence of the electoral bond in the new code suggests that the government does not consider the electoral bond to be redundant, and proposes to bring it back in some other form. If that is not the case, the elimination of redundant provisions would appear to be less than thorough. The government should clarify matters, in either case.
Tax practitioners will weigh in with their observations on the provisions of the new code and how they could be improved. While we await this process to be completed, there are two considerations that merit our collective attention.
One is the failure of our tax collectors to make the economic connection between the goods and services tax and the tax on incomes. The GST paid by a company on a product or service leads you to the value added by the company. In jurisdictions that give GST the simpler name, Value Added Tax, this might be more obvious. The tax is paid on the value added by the enterprise. Suppose a company pays GST of Rs 180 lakh at the rate of 18%, the value added by the company is Rs 180 lakh/0.18, or Rs 1,000 lakh.
The gross value added by an enterprise has two elements: gross profits and wages and salaries. This provides for an automatic audit of the financials filed by a company. If gross profits and employee compensation do not add up to the value added computed from the GST paid, the company has fiddled its accounts.
From gross profits, the route to taxable profits is not complicated. The identity that gross value added necessarily breaks down into gross profits and employee compensation also can help the Employee Provident Fund Organisation check if the company reports its actual employment figures and pays in the mandated contributions to the provident fund.
If an enterprise tries to suppress its worker numbers, it would either have to exaggerate its gross profits, and be liable to higher corporate income tax liability or be answerable as to the identity of the relatively high-paid employees that account for a large salary bill but still do not pay income tax in proportion to the compensation paid by the company.
The other general observation that must be made relates to the potential of the new code to reduce litigation. It is not the case that disputes arise only because of the obtuseness and opacity of the language of the tax law. That is one factor. An even more significant one is the lack of trust in the system.
If a tax officer concurs with a particular assessee’s claim that its tax liability is lower than might appear at first blush, he or she runs the risk of being accused of causing loss to the exchequer, by some busybody or the other, who reviews that decision later.
Ever since the Comptroller and Auditor General came up with the notion of ‘notional loss’, and saw mala fide in the generation of such notional loss in the telecom sector, and, as a result, a telecom secretary went to jail, along with a couple of politicians, pending trial and eventual dismissal of the case, no civil servant is keen to take a stand that could invite future censure of causing loss to the exchequer.
It is safer for a tax officer to deny the assessee’s claim and let the matter be decided by the appellate body or the relevant high court.
There is nothing in the new tax law that averts such a contingency. There are more than 7 lakh pending cases in which the Union government figures as a litigant. The figure reflects not so much the slippery nature of the citizenry as the lack of trust in the government, which forces government personnel to let a court decide matters that involve a potential loss to the exchequer, rather than take a decision and run the risk of being accused of causing loss to the exchequer.
Making the linkage between GST and income tax or changing the culture of distrust in the government are not necessarily contingent on better drafting of the income tax code. But it would be useful for the debate on income tax to be informed by such considerations.