HOW TO BRING TRANSPARENCY IN TAXATION SYSTEM IN INDIA? By - Asmita Saha
HOW TO BRING TRANSPARENCY IN TAXATION SYSTEM
IN INDIA?
Authored By - Asmita Saha
Semester-7,
4th Year
BBA.LLB.(Hons.)
Symbiosis
Law School, Pune
Introduction
A country's economic development depends upon its
tax structure and India's tax structure has gone through a lot of development.
India's taxation system is a three-tier setup where both the Government at the
Centre and the State can implement taxes. And indeed it is one of the complex
systems as it levies a tax on income, wealth-acquired gifts, and property,
apart from GST. The prevalence of multi-taxes already burdens the citizens but
apart from this, the growth of a parallel black money economy was also growing
which could not be curbed down by the Government along with tax evasion. To
promote a proper and efficient tax system along with it being transparent
became the need of the hour. For this, it is very necessary to identify the
loopholes in the legislations, how the tax collection works, and amend or bring
stringent laws to correct them.
India's tax regime’s outlook has changed over the
years beginning with Value Added Tax, being replaced by Goods and Services Tax
in 2017, and now presently the Transparent Taxation- Honouring the Honest
Scheme to curb down and seal the loopholes of the tax system practiced in
India.
Understanding of Problem &
Issues
Committee set up for Direct Taxes Enquiry stated
that, “Black money and tax evasion, which go
hand in hand, have the effect of seriously undermining the equity concept of
taxation and warping its progressiveness. Together, they throw a greater burden
to the economy.”[1]
India's taxation system is highly complex which
prevents it from being seamless, efficient, and transparent and at the same
time faceless. To have a transparent efficient taxation system in India, it is
very necessary to fix these three major pillars:
·
To have a faceless
assessment and appeal
·
The physical
interface between the taxpayer and the tax department needs to be ended
·
Abide by the
taxpayer’s Charter which states the
rights and obligations of a taxpayer
The issue
is how to bring transparency in the taxation system of India to make it
efficient and rectify the loopholes pertaining presently.
Literature Review
Major Issues
in Tax System in India by R. Kavita Rao and M. Govinda Rao analyses
India's taxation system. It scrutinizes how the tax system evolved over the
years and how much efficient it is, in its implication. Apart from this, it
also presents an indepth analysis of the historical and institutional factors
which shape the tax policies over the years in the country.[2]
Tax
Administration Reform in India discusses
the measures required to widen up the scope of tax base along with tax payers
base. It also gives recommendations on the existing mechanism while suggesting
the need for a better one, for enforcing tax compliance and transparency in the
system.[3]
Income Tax
Data and Facets of Democracy by R. Kavita Rao discusses how India’s
phase of tax terrorism is changing to tax transparency. It focuses on the
transparency aspect by deducing it from the Income Tax data using tables and
charts.[4]
Supporting Evidence and Arguments brought by
Government to bring transparency in the tax system
·
India took the initiative of CbCR, that is, Country by Country Reporting Standards
for maintaining tax transparency in international transactions and the IT
Department to have a consolidated database of all the activities carried out by
multinational companies or enterprises. The Indian Central Board of Direct
Taxes set forth rules to maintain and furnish the Master File and CbC Reports
with the respect to the international group. This also fulfilled India's goal
of BPES Action Plan 13.
·
India is also a part of the Multilateral Competent Authority Agreement to curb black money
transactions.
·
Business Responsibility and Sustainability Reporting introduced by the listed companies listed takes the
initiative to create awareness regarding the ESG, that is, environment, social,
and governance consciousness among the businesses. India has made this report
mandatory for the top 1000 companies listed.
·
Document Identification
Number or DIN which
is a unique computer-generated identification number allotted to every assessment or investigation, appeal, or penalty or, be
it rectification to ensure transparency and efficiency in the Income tax
department.
·
The 2019 scheme of Transparent Taxation-Honoring the Honest was initiated and put into force to simplify the taxation process
mainly by minimizing the physical communication or give and take, and ensuring
transparency in the income tax department to prevent any kind of illegal and
foul action. This scheme comprises:
§ Faceless Assessment Scheme: Here, initially
there was a significant level of physical interaction between the taxpayer and
the jurisdictional income tax officer. To eliminate this, the faceless
assessment was the first structural reform brought to the Indian tax system.
Operations are carried out by a group of remotely based officials and the
notice sent can be seen via electronic mode by the taxpayers. Thus, reducing
the physical interaction and chances of fraud actions being carried out.
§ Faceless Appeal Scheme In faceless appeals cases shall be randomly designated
without the taxpayer paying a visit to the office and shall be chosen by AI
using the data stored after analysing it.
§ Taxpayers Charter provides
protection to the taxpayer at any stage of the assessment and also would not
reveal any information of the individual taxpayer unless if it is required
legally. The individual taxpayer when required shall choose their approved
representative for carrying out the procedures. There would be methods
formulated for raising any kind of removal or protest.
Case Laws
·
Vodafone International Holding BV v. Union of India, Supreme Court directed “the Indian Tax Department to return 25
million rupees which were deposited by Vodafone in compliance of its interim
order within 2 months along with 4% interest. This ruling on FDI is a debated
one as it not only gave a positive outlook to the foreign investors but was
only benefitting the FDI in long run. But was criticized for avoiding tax by
using artificial devices in the name of tax planning.” [5]
·
In McDowell & Co. Ltd. v. CTO, the Supreme Court in its judgment
“drew a dividing line between the evasion of tax and avoiding of tax through
tax planning. It stated that colorable devices can’t be a part of tax planning
and also wrong to encourage or entertain the belief that it is honorable to
avoid the tax payment by resorting to dubious methods.”[6]
·
In Banyan & Berry v. CIT, Justice Balia too drew “a silver line in
respect of tax planning. The Court depreciated the methodology of tax avoidance
through tax planning of resorting to colorable device, dubious methods or
subterfuge.”[7]
·
In M. V. Vallipappan v. ITO, the Madras High Court stated that “every
attempt at tax planning is illegitimate and must be ignored, or that every
transaction or arrangement which is perfectly permissible under law, which has
the effect of reducing the tax burden of the assessee, must be looked upon with
disfavour.”[8]
Facts & Statistical Analysis
·
As per the 2020
Reports based on the faceless assessment of the 2019 cases, it is observed that
less than 0.26% of the tax files were selected for audit. Tax Returns were
filed by less than 4.18% of the population.
Achievements
·
Tax Transparency Report of TATA STEEL for 2021
Chart: Group Contribution for FY
2020-21 and the Annual Trend
Chart: Indian Business
Contribution for the Years 2016-2017 to 2020-2021 and for the Financial Year
2020-21
·
Horizontal Tax Monitoring which is
followed by the Dutch Tax Authority established an open and transparent
relationship with the taxpayers. It puts forth more clarity, proactively
identifies and manages risks related to tasks also fasting up the tax return
process.
Opinion
This 3-fold structural reform carried out by the Government
is a must-try as it is an initial step towards promoting tax transparency and
its implementation will only lead to further observation for rectification and
to promote of a transparent taxation system in India. As per
the 2020-21 Union budget data, an amount of Rs. 8.02 Lakh Crore related to
direct tax is disputed with approximately 40% of it being pending to be
resolved for over two years.
·
The Faceless Assessment was introduced so as to avoid any kind of human
interface or interaction between the citizen paying tax and the Income-tax
division to cut down all sorts of corrupt practices carried out. As per Income Tax Act, 1961’s Section 143(2), 1961,[9] the
National e-Assessment Center can issue a notice on the assessee for
determining the issues for picking up a case for assessment to which the answer
has to be written down within a time frame of only 15 days. After this, cases
are assigned to Regional e-Assessment Center for investigation where the
individual hearings are held via video conferencing. All the interchanges are
sent through electronic media. As per Section 119, the Central Board of Direct
Taxes order states coordination of the investigation officers and the officers
of the TDS department will only be the Income Tax Authorities to direct the
overview under Section 133A.[10]
·
Faceless
Appeal was brought into force by amending the Income Tax Act of
1961’s Section 250(6A)[11]
and introduces two angles, that is, reassessment and examination.
Approximately, 30 to 40% cases are there for reassessment which can be
dismissed once electronically the accurate income or the hidden income is
revealed leading to the source of error or fraud committed.
·
The
Tax Payers Charter safeguards the security and matters related to
classification for the citizens, which was too stated in Justice K.S. Puttaswamy & Anr. v. Union of India case. The case
stated that ‘Taxation laws which require the furnishing of information
certainly impinge upon the privacy of every individual which ought to receive
protection.’[12]
Suggestions
·
Whenever there is a disagreement, it is suggested
to have a constructive dialogue with the authorities in charge of the concerned
matter to solve the issue within a stipulated time frame.
·
It is necessary for every Indian company to present
it's TTR to the Government. Tax Transparency Report is a report which discloses
the tax contribution made by a company to the Government where they operate.
This step would ensure maintaining a transparent dialogue with stakeholders on contribution made to public
finances.
·
BRSR mainly
revolves around the ESG aspects but at the same time it also, focuses on any
framework that supports increased tax transparency and also, reporting. Indian
companies like, Vedanta or Cipla have taken inspiration from huge tax
transparent companies like Netherland’s Unilever or US’s Johnson & Johnson
by adopting the GRI 207 standard for their tax disclosures. This needs to be followed
by the other Indian companies too, to promote tax transparency.
·
Presently, we should
promote voluntary disclosure of taxes by businesses and multi-national
companies. This would show their relevance to society as a direct indicator of
their contribution to all stakeholders, which include, customers, vendors or
regulators, employees and investors rather than as a statutory obligation.
Conclusion
Tax
avoidance is a major problem in India as in the 1.2 billion population, only 3%
pay income tax, but in this many evade paying tax. As per the current report of
the State of Tax Justice, India loses more than Rs.75000 crore because of
international corporate tax abuse and private tax evasion. At the same time,
the statistics show that around 0.41% of the three trillion dollar GDP of India
is lost in tax abuse. All of these show the deep rooted abuse, corruption and
fraudulent activities of taxes in India's taxation system. We needed reforms to
fix these, so for this, the government came forward with the Faceless Scheme.
With this begins the era of transparent taxation.
Transparency
in India’s Tax System can become a truth from myth only if the citizens too,
support the Government by abiding by the norms set forth by the Tax Payers
Charter. Not only individuals but also companies need to follow tax practices
diligently by avoiding illegal and fraudulent practices.
References:
·
TaxPayers
Charter, Income Tax Department
·
R.
Kavita Rao, Income Tax data and Facets of transparency (2022).
·
3rd
Report of the Tax Administration Reform Commission, Ministry of Finance, GoI
(2014).
- Transparent Taxation a
move to revolutionize Indian tax administration, India News (2020).
·
R.
Kavita Rao and M. Govinda Rao, Trends and Issues in Tax Policy and Reform in
India.
·
Finance
Commission in COVID Times, 15th Finance Commission Report (2020).
[1]
Direct Taxes Enquiry Committee (1971).
[6] McDowell
& Co. Ltd. v. CTO (1985) 154 ITR 148 (India).
[7] Banyan
& Berry v. CIT 1996 222 ITR 831 Guj. (India).
[10] The Income Tax Act, 1961, No.
43, Acts of Parliament, 1961 (India).
[11] The Income Tax Act, 1961, No.
43, Acts of Parliament, 1961 (India).