Yet Another Reminder on Tax Reforms
DECEMBER 19, 2019
By TIOL Edit Team
PARLIAMENTARY Standing Committee (PSC) on Finance has once again turned torchlight on the tax reforms agenda. The Government's earlier actions taken on reform initiatives mooted by different panels has had varying degrees of outcomes. Hence PSC's reiteration of reforms by factoring in latest situation deserves special consideration.
In its report on the Department of Revenue's (DOR's) demand for grants (DFG) for 2019-20, PSC has focused on tax base, direct tax code, GST flux, undisputed/uncollected tax, search & seizures, tax litigation, tax data and under-utilization of budget allocations by DoR& its appendages.
The Government should consider PSC recommendations along with the not-yet disclosed reforms package recommended by 15th Finance Commission inits first report submitted recently. The Finance Ministry should also factor in recommendations made by several other committees & studies. We anticipate unveiling of slew of tax reforms in the forthcoming budget for 2020-21.
DoR disclosed to PSC that the total number of taxpayers is 8.45 crore for assessment year 2018-19. Assuming the total population of the country to be 130 crore, the percentage of taxpayers work out to be 6.2%.
DoR has also communicated that it has no data of all citizens who should file returns or pay income-tax.
In its 3rd report submitted in December 2014, Tax Administration Reform Commission (TARC) had estimated potential taxpayers base at 12 crore. This base would certainly be much bigger today keeping in view growth & expanding profile of economy.
A subsequent study commissioned by Central Board of Direct Taxes had noted that both tax policy and other economic variables are important determinants of number of taxpayers. As put by Study undertaken by National Institute of Public Finance and Policy, "it is essential to have a clear policy perspective on whether the tax department wants to concentrate on revenues alone and hence concentrate on revenue yielding taxpayers who also happen to be from higher income groups, or whether the marginal taxpayer too needs to be brought in to improve the culture of compliance".
The Study stated:"Once a decision in favour of the latter is taken, there are a series of policy and administrative decisions that can aid in reducing non-filing" of returns.
According to the study titled 'Development of an Analytical Model for Widening of Taxpayer's Base' published in March 2015, the Finance Ministry should refrain from increasing the exemption threshold too frequently.
It should "limit the benefits from tax policy incentives to individuals/agents who comply with the tax laws like filing of returns". The Government should also incentivize "the move away from cash to other financial instruments".
We don't know whether & with what efficiency such recommendations to widen tax base and taxpayers base have been implemented over the years.
It is thus not surprising to find PSC urging DoR to reformulate its policies and strategies to have a wider tax base. It says: "in order to broaden the tax-base, the Government should bring the new Direct Tax Code in line with global best practices, keeping in view the country's economic needs".
Simultaneously, PSC has voiced its "concern that the Department does not maintain sector/category-wise data-base on important areas of revenue operations".
It has thus suggested that DoR should become "more pro-active by maintaining complete data-base".
PSC has also noted an avoidable time-lag between the search/survey operation and passing of the assessment orders and disposal of all the appeals relating to the same. It believes that delays defeat the purpose of these operations.
DoR is not able to maintain centrally, data of actual tax yield of searches and surveys due to time-lag between the search/survey and passing of assessment orders.
The Committee, therefore, advised DoR to curtail this time-lag and maintain data on actual tax yield of searches and surveys so as to judge the efficacy of this process. In addition, the Committee would like appropriate grievance tracking and redressal mechanism during this process.
PSC is perturbed to find that the 'Demand difficult to recover' direct taxes as on 31.08.2019 aggregated to a whopping Rs 12,17,749 crore.
As put by the Report, "The Committee are desirous of knowing whether this is on account of unreasonable demands or because of other reasons beyond the control of Government".
PSC is worried over the fact that DoR is a significant contributor to litigation in terms of number of appeals filed before the Tribunals and Courts, albeit with a low success rate.
It has thus called for systemic changes in tax administration to address the lacunae in the dispute resolution mechanism. PSC says that the monetary limit of 'tax effect' for filing of cases by the Income Tax Department should be revised significantly upwards to minimize litigation. [Incidentally, the CBDT had vide its Circular 17/2019 dated 8th August 2019 further raised the monetary limits for filing of income tax appeals by the Department before In come Tax Appellate Tribunal, High Courts and SLPs/appeals before Supreme Court. They now stand at Rs.50 lakhs, Rupees One crore and Rupees Two crores respectively. ]
This strategy should enable the appellate for a and judiciary to focus on high-value litigation and clear the massive backlog of pending cases.
As for goods and services tax (GST), PSC, like all other stakeholders of economy, expects the Government to "resolve all the troubling issues relating to GST at the earliest to achieve the desired revenue buoyancy".
PSC has pertinently urged DoR to "prevent misuse of provisions such as input tax credit and enhance monitoring of overall compliance". It wants the Government to collect systematic reports and feedback from taxpayers to "evaluate whether GST is operating smoothly".