Tax policy in the wake of Covid-19

Tax laws should be drafted to address concerns of a large proportion of honest taxpayers instead of focusing on the minor percentage of tax evaders.

Tax policy
Tax policy

The SARS Coronavirus Disease 2019, in short Covid-19, has turned the world upside down. Not only has it affected the health of millions of people and claimed thousands of lives, but this pandemic has also bled economies across the globe. The world order would change by the time this virus mutates to being harmless or a vaccine is developed. Human behaviour would change. Human psychology would change. The industry would reflect on what to produce and, more importantly, how much to produce. Government relations would change. Nationalism may rise to the next level. Tried and Tested Way Whenever a challenging situation arises, we always look for an experienced person for his counsel. The adage that experience has no substitute seems to be becoming irrelevant. No economist or administrator alive has ever dealt with a crisis of this magnitude. Therefore, what kind of tax policy should be adopted by the country remains a nagging question to be dealt with by the legislature and the tax administrators? The emergence of Mutual Trust and breaking of servile mindset Assertive emergence of unity and mutual respect in society is the most significant positive out of this crisis. Since Independence, there has always been a sense of mistrust between the Executive and the civil society at large. Civil society has responded and demonstrated ubiquitous discipline.

The police and public administration have manifested their humane approach denuded of insouciance. Not to mention, the political class and NGOs which extended their hands to make sure that nobody starves. Political leaders walked the extra mile to resolve day-to-day challenges that continue to materialise during this crisis. Of course, all this with certain minuscule exceptions. Be it the challenge of stranded migrant labour or Indians stuck in foreign countries, the political class has addressed these issues deftly and with finesse. This kind of amalgamation of society and the mutual trust and respect between them have proved to be genuinely surreal. The community now values the contributions made by the lower strata as well and appreciates their crucial role in the day-to-day functioning of the country. Not only this integration, but the pandemic has also provided Indian society with a fresh air of confidence that boldly states that we don’t need approval from Western nations. While most of the Western countries have struggled miserably in containing the damage from the pandemic, India, with its limited resources, has done remarkably well. Such achievement has certainly killed its inferiority complex. A sense of pride has set in upon successfully containing the spread of this pandemic. Inclusive Tax Policy The tone has been set in society. The time is ripe to revisit the tax policies. In my view, when the experience is not in the position to help and is unable to show us a way, we should look towards the principles to guide us. The principle to which I am referring is the principle of inclusivity.  When we refer to inclusivity in terms of tax policy, we need to see it from the point of view of taxpayers. What proportion of the taxpayers are included while drafting the tax policy? In other words, tax laws should be drafted in a manner that addresses the concerns of a large proportion of honest taxpayers instead of focusing on the minor percentage of tax evaders.

By concentrating too much on tax evaders, the law becomes an impediment for small and honest taxpayers. Accordingly, while drafting tax policy, it should keep in mind at least 90% of the taxpayers. For example, it is a known fact that income tax scrutiny assessment is carried out on a minuscule proportion of taxpayers. Even out of that small proportion, a tiny percentage of taxpayers are actually found to have indulged in tax evasion. Whereas, when we look at our tax laws, particularly compliances and administration, irrefragably, they are skewed to address tax evasion. As a result, compliance procedures have become complex, complicated, voluminous, repetitive, and costly. Similarly, the interaction with tax officers is often unpleasant and strained. We should refrain from having a mindset of a mere tax collector. The trust which we, as a society, have built should be further cemented. Let taxmen act as the facilitators. I am sanguine that once this perceptible change is seen, the taxpayers would honestly and willingly pay their taxes. Besides this, the newfound sense of nationalism can be capitalised to induce the consumption of products made in India. It would also encourage MNCs to set up manufacturing facilities in India. Government has already indicated to have a re-look at the Advance Pricing Agreements under Transfer Pricing regime. This is an encouraging sign and a step towards having inclusive tax policy. Some suggestions Therefore, in my view, the tax policy should be entirely overhauled without effecting too many amendments, preferably in the following manner: From the point of view of taxpayers: With the increased use of information technology, compliances in terms of filing of returns need to be reduced drastically.  GST returns may be filed on a quarterly basis, and the number of returns for each quarter may be reduced to two.

Fiscal offences like a delayed deposit of tax with the government exchequer should be penalised with interest-only and such offences, should be de-criminalised. The certificate provided by designated professionals like Chartered Accountants should be accepted at face value, unless it is established that such a certificate was issued with gross negligence or with malafide intent to defraud the exchequer. In such cases, the professional should be reported for disciplinary action by their mother institute.  In case of the variance of the returned tax and assessed tax, differentiation must be made between a bonafide mistake and a malafide tax evasion. The former may be subjected to interest only, and the latter may be subject to penalty. In other words, the penalty should not be mechanical, and the penalty proceedings may be initiated sparingly.  Tax recovery proceedings may also be more inclusive and not deleterious. The recovery of tax demand may be carried out as a percentage of sales rather than suffocating the business of its working capital. Coercive actions like Surveys, Search, and Prosecution may be suspended.

The government may cement the trust by suspending the Search & Seizure, except where the cases are relating to money laundering or corruption are involved. The scope of Vivaad se Vishwas scheme is expanded for prosecution cases, if the taxpayers pay tax along with interest. In the case of large amounts, payment in instalments may be allowed.  The internal instruction for identifying the prosecution cases may be revisited to align with the principle of inclusivity. In other words, only matters arising out of money laundering or corruption cases may be taken up for prosecution. From the point of view of tax administrators Apart from the other parameters in the Confidential Appraisal Report, the following kind of data may also be updated on annual basis for each of the officer and make it the grounds to be considered for promotions etc. a: Amount of addition made b: Less: Addition deleted in First Appeal c: Less: Addition deleted in Second Appeal d: Less: Addition deleted in Third Appeal e: Addition survived Such data in the CAR, may discourage officers to pass usurious assessment orders and instead, quality assessment would be encouraged.

Risk assessment policy be shifted from being an ABC analysis to have a larger tax base. Scrutiny Assessments in Tier 2 and Tier 3 cities may be enhanced as most of the business in the unorganised sector takes places there. We must use this crisis as an opportunity. Tax laws can be used as a tool for social and national integration. It can be used to devise a plan to mitigate the migration and correct uneven development, which may permeate through the length and breadth of our vast and diverse country. Needless to say, when the taxpayer would realise that taxmen are there to educate and guide them, they shall reciprocate in the discharge of their genuine tax liability. Hopefully, the anti-avoidance provisions in the tax legislation may become redundant. Gagan Kumar is a practicing Advocate and founder of Krishnomics Legal. He is a qualified Chartered Accountant.