SEPTEMBER 18, 2013

By Naresh Minocha, Our Consulting Editor

THE groundswell of proposals for comprehensive tax reforms has reached a crescendo both within and outside the Government. Several suggestions from different quarters have lately emerged in addition to the ongoing efforts to tweak the proposed Direct Tax Code (DTC) and Goods and Service Tax (GST).

The wealth of emerging suggestions including the ones to be made by awaited global report on Paying Taxes 2014 should make the task of Tax Administration Reform Commission (TARC) easier.

TARC should seize this as defining and decisive phase for making tax regime simpler, credible, fair and robust by shifting the authority for frequent tinkering with tax structures from Finance Minister of the Day to Parliament.

The basic mantra of tax reforms should be that tax rates can't be altered and new taxes sneaked in under the garb of surcharge or cess imposed in the annual budget without mustering two-third votes in Parliament. And policies, once framed after public consultation, should not be changed or discarded to serve the vested interests.

The Executive should insulate itself from the dubious compulsions of coalition politics, corporate lobbying and electoral politics by making two-third voting in Parliament as a pre-requisite for any tax structure. Alternatively, Finance Commission should be empowered to recommend the mandatory tariff structure for five years.

As put by Richard Bird, a reputed banking consultant, "Three ingredients are essential to effective tax administration: political will, a clear strategy, and adequate resources."

In a paper captioned ‘Smart Tax Administration' incorporated in the World Bank's publication Economic Premise dated October 2010, Mr. Bird stated: "If the political will exists, the blueprint for effective tax administration is relatively straightforward."

TARC should take cue from Mr. Bird's wisdom and remind the Political Executive that it has been largely responsible for transforming taxation reforms into a one step forward and one step backward exercise all these years.

Before coming to TARC's all-encompassing mandate, hear what some of the latest official committees are saying. This would give us an idea of the mess that we are in even after over 27 years of credible taxation reforms that started with the announcement of now forgotten Long-Term Fiscal Policy (LTFP) in December 1985. Leave aside the reforms recommended by various committees prior to that.

Had the successive Finance Minister respected LTFP, there would have been no need for transforming tax reforms into infinite exercise.

LTFP had said: "a time honoured canon of taxation is stability. Too frequent changes in tax structure are a source of uncertainty, which discourages tax compliance, creates difficulties for effective tax administration, and takes its toll of economic growth."

The other day Prime Minister's Economic Advisory Council (EAC) observed: "Industry and associations and investors have repeatedly underscored the urgent need for improving the ease of doing business by streamlining procedures, making tax policies more predictable and putting in place a transparent dispute resolution mechanism for both direct and indirect taxes."

In its Economic Outlook for financial year 2013-14 issued on 13 th September, EAC thus recommended: "When bold fresh policy decisions are taken, it is important that details are fleshed out before they are announced. Investors should not be surprised later through fine print."

TARC should in fact consider recommending formulation of rules an integral part of any draft taxation bill. The Government can go one step further by incorporating detailed rules under different provisions of all bills right at the time of their introduction to Parliament.

This would enable concerned Parliamentary Standing Committee to scrutinize the detailed legislation after completing the public consultations. Framing of rules post enactment of a law should be made an exception.

One can safely assume that this process of enacting laws would remove anomalies, contradictions and loopholes right from the start. It would also make redundant the need for retrospective changes in taxation laws.

The Law Commission should study such fundamental reform taking into account the larger domain of central, state and local laws and its beneficial impact on the society, economy and the judicial system.

A few days prior to release of EAC report, the Committee for Reforming the Regulatory Environment for Doing Business in India (DBI) also lent its weight to the need for bringing sanity and certainty in wielding of taxation stick.

In its report submitted to Ministry of Corporate Affairs, DBI Committee says: "It has often been said that death and taxes are equally undesirable aspects of human life. Yet, it can be said in favour of death that it is never retrospective. Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India."

It continues: "While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity. This is a major area where improvements should be attempted sooner rather than later since business cannot take corrective action retrospectively."

The DBI report observes that tax assessing authorities do not take cognizance of rulings by higher authorities in matters where the facts in issue and the principles of law are identical. This has the further drawback of crowding the system with matters which should have been decided at the level of the assessing authority.

While appreciated that the judgment of the assessing authority cannot be substituted by the directions of higher authorities, DBI committee suggests: "there would be no harm in the issuance of a general circular to the effect that assessing authorities would be obliged to take note of rulings of higher authorities in identical matters."

TARC should not only pay heed to such sage advice but also collate and discuss taxation reform proposals from sector or issue-specific committees, Comptroller and Auditor General's reports, Public Accounts Committee, Finance Commission and other committees/commissions and major tax verdicts from the judiciary.

It should tabulate all unimplemented tax reforms proposals made over the last 20 years and incorporate them in consultative papers. This should make the reforms process meaningful.

TARC should mull over the ignored, best taxation practices recommended by multilateral and other foreign entities over the years.

Notified on 26 th August this year, TARC is chaired by Dr. Parthasarathy Shome, Adviser to Finance Minister. TARC should thus also factor in Dr. Shome's own clear-stand on several fiscal issues including retrospective taxation.

TARC's 13-item terms of reference (TOR) covers everything that has to do with the taxation. Its mandate is thus much more than what the Finance Minister P. Chidambaram had proposed in his budget speech for 2013-14.

Mr. Chidambaram had stated: "An emerging economy must have a tax system that reflects best global practices. I propose to set-up a Tax Administration Reform Commission to review the application of tax policies and tax laws and submit periodic reports that can be implemented to strengthen the capacity of our tax system."

TARC has a challenging task before it if India's abysmal ‘Overall Paying Tax Ranking' is any indication. It occupied the 152 nd slot among the 185 economies reckoned by Paying Taxes 2013 Study. The country also got modest score on the issue of ‘Effect of taxation on incentives to invest' as measured by World Economic Forum in its The Global Competitiveness Report 2013-2014 released earlier this month.

TARC's mandate include reviewing organization framework for taxation, different aspects of governance of taxes, Inter-agency information sharing, not only between Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs(CBEC) but also with the banking and financial sector, Central Economic Intelligence Bureau (CEIB), Financial Intelligence Unit (FIU), Enforcement Directorate etc.

It also has to review the existing mechanism and recommend measures for deepening and widening of tax base and taxpayer base. Another important task of TARC is to review the existing mechanism and recommend measures to enhance predictive analysis to detect and prevent tax/economic offences.

Enough has been recommended and commented upon on each and every issue to be studied by the Commission. It thus remains to be seen what new and innovative measures it would recommend on different issues.

The original intent of embracing the best global practices does not figure in the TOR of TARC. It finds mention only as mere reiteration of Mr. Chidambaram's statement in introductory paragraph of the announcement about TARC constitution.

The disconnect between Intent-TOR should not lead TARC to pay insufficient attention to the prospects of assimilating the best taxation practices identified by the United Nations, the World Bank, International Monetary Fund, Organization for Economic Cooperation and Development (OECD), Asian Development Bank and various consultants.

OECD's ‘Principles of Good Tax Administration – Practice Note' issued in September 2001 has elaborated several principles, a few of which require TARC's attention. These include applying tax laws in a fair, reliable and transparent manner, remunerating employees at a level sufficient to attract and retain competent individuals, applying the provisions of tax treaties in a fair and consistent manner and endeavouring to ensure proper interface between trade and taxation agreements.

TARC can also ponder over another guide captioned ‘ OECD Best Practices for Budget Transparency' published in 2002. It, among other initiatives, calls for release of a pre-election report to illuminate the general state of government finances immediately before an election. It also suggests preparation of a long-term report to assesses the long-term sustainability of current government policies. The latter document should be released at least every five years, or when major changes are made in substantive revenue or expenditure programmes.

TARC can also take a hard look at the tax rules and procedures of the countries that hog the limelight in the comparative tax studies.

According to a Study on Best Practice in Tax Administration undertaken by a consultant for the UK's National Audit Office issued in October 2007,"Three general exemplars of best practice are Australia, the Scandinavian countries (collectively) and Ireland. However, there are many other countries with good tax administrations – and these are often leaders in specific areas."

TARC should thus focus on spotting the best practices in different countries while looking for reasons for the failure to implement good recommendations proposed within the country over the years.

With the welfare economics and human rights becoming the focus of good governance, it is time to draw TARC's attention to the need for sustaining buoyancy of tax receipts to finance socialistic State.

It is apt to conclude by quoting a document titled ‘Best practices in the tax administration for sustained revenue increase for social development' issued by Commission for Social Development, United Nations.

It says "A proper Tax System is one that generates the resources required by the State as established in its design; this usually means establishing tax burden for all as a common duty of citizens. It is simple if the compliance process and control is clear, and it is fair when everyone pays according to their ability to pay (horizontal equity) and are treated as equal for all, and unequal for those who are under different circumstances (vertical equity)."