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Tuesday, 05 February 2019 04:08
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An 18-fold hike in fresh direct tax disputes over the past decade makes it clear the taxman needs to fix policy first

Finance minister Piyush Goyal would have gladdened most taxpayers by announcing, in his budget speech, that the government plans to overhaul the tax department in such a manner that, within the next two years, all returns will be assessed within 24 hours and refunds issued simultaneously; and “almost all” verification and assessments of returns selected for scrutiny will be done electronically through a back office manned by tax experts and officials, with no personal interface between taxpayers and tax officers. Given how human interface between taxpayers and officials is one way to encourage corruption—indeed, the attempt over the past few years has been to reduce this—this is welcome; and given how long tax refunds can take, simultaneous refunds is very good news.

Making such a system work, of course, requires having very clear rules and responses of the central board of direct taxes (CBDT) on tax matters, especially where there is a difference on interpretation; in a “technology-intensive” system that Goyal spoke about, one ruling by a taxman or tribunal is likely to get replicated quickly since most systems relying on artificial intelligence (AI) will use each such a ruling to build their knowledge repository. In the ongoing controversy over the ‘angel tax’, where start-ups are being taxed on the premium they get from angel investors, for instance, the government has yet to come up with an unambiguous statement that these are not to be taxed; and if such investments are not to be taxed, how is it to apply to other such investments? Similarly, when the taxman decided to levy a minimum alternate tax (MAT) on FPI investors, this was despite the fact that different appellate tribunals have ruled on it in different ways. And in the MakeMyTrip case, the taxmen arrested a senior official of the travel portal for not paying service tax on that part of the money that was passed on by it to hotels and airlines … there are many such cases. It was just a few years ago when the taxman was making all manner of exaggerated claims on MNC subsidiaries in the country by way of transfer-pricing adjustments to the incomes of their India operations; while the CBDT was slow to react to the initial protests, it was only after the additions to the incomes of firms crossed a few lakh crore rupees and the US government intervened that a committee was set up and the matter resolved.

Also, no system can work unless a way is found to penalise taxmen for perverse rulings and to encourage them for good behaviour. So, while the taxman is quick to levy taxes, the new system must build in checks for how various tribunals/courts rule on various matters and then advise taxmen accordingly each time a new assessment is made; if the principle behind a tax has been rejected by the court, why should this be used again? While the authorities claim to be doing this even today, it is worth keeping in mind that while direct tax disputes that are 1-2 years old added up to Rs 17,625 crore in FY08, these jumped nearly 18-fold to Rs 313,387 crore in FY18—while total disputed direct taxes, including those that were over a decade old, rose from Rs 47,152 crore to Rs 623,539 crore, the fact that 1-2 year-old disputed taxes were so large makes it clear the problem is not just related to older cases. No tax system can function well if such issues are not sorted out at the earliest, but in an automated system—that will have to rely on artificial intelligence also—the need to do this will increase manifold, else the problems will increase dramatically.

 
 

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