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The tragedy & tyranny of India's tax administration

"When there is an income tax, the just man will pay more and the unjust less on the same amount of income. -- Plato"

It is a tyranny that the British could not have considered for colonial India, a tragedy that Shakespeare would not have plotted for his plays. It is a catastrophe of unimaginable proportions that we the people of Socialist, Democratic and Secular Republic of India have wrought on ourselves.

A mere call from them could wrench your guts, debilitate your psyche and shatter your inner peace.

Not replying could land you in big trouble. Replying could bring you bigger trouble.

A personal visit to them could considerably dent your dignity and end up torturing your conscience.

A visit from them would result in paranoia and insult. You can neither live with them nor, unfortunately, without them.

Lest the readers get me wrong, I must hasten to add that we are not talking of a brush with the underworld. Rather we are indeed talking of a common man's tryst with Tax departments of the Indian government -- the Income Tax, Customs, Excise, and Service tax.

To paraphrase Churchill, perhaps never in the history of mankind have so few terrorized so many, officially, legitimately and constitutionally.

"When there's a single thief, it's robbery. When there are a thousand thieves, it is taxation," goes the adage. Yet, strangely taxation is rationalised as the price we pay for civilization.

Economists -- especially in India -- have been clamouring for an increase in the tax-to-GDP ratio for the past few years. Often they complain that India is not taxed 'adequately' and point out to our 'abysmal' tax-to-GDP ratio -- which stands approximately at 15-17% (all states of the Union included) -- and is far less than any developed country.

But what is forgotten by economists is that for every one percent increase in the tax-to-GDP ratio, the corruption levels in this country increase exponentially.

Naturally, it would be not be out of place to mention that taxes -- especially Income Tax -- have made Indians more corrupt than any other policy. This when the tax rates in India in recent times are moderate compared to the rest of the world.

Avoiding taxes has become a national pastime in this country. What is obviously lost in the debate about tax rates, exemptions and deductions is the pathetic state of tax administration in this country (I cannot call it tax-jungle. Can I? But strangely every jungle has its own law, but definitely not tax administration).

Put pithily, while tax rates have indeed moderated over years, tax administrators are yet to become moderates. Further, whether or not every amendment to our tax laws leads to increase in its revenues, it invariably ends up increasing the income for our tax administrators.

Maddening amendments, perverted interpretations
Every assessment, a senior lawyer once remarked, is a compromise between the tax administrator and the assessee, 'brokered' through a professional, to defraud the revenue of its dues. Not only are our tax laws so complex that you require professional help to pay your taxes honestly and diligently, you need it all the more to 'intelligently manage' the officers in these departments.

That explains why tax professionals are a pampered and privileged lot in the society.

At the root of the problem is the fact that the Income Tax law that has become so perverse with each passing year that apart from benefiting the community of tax practitioners, one does not find any improvement at the ground level in the stated attempts of successive finance ministers in simplifying tax laws.

On the contrary, whenever finance ministers announce that they would be embarking on a major exercise of simplifying tax laws, they have ended up invariably complicating matters. Given this track record, one shudders at the very proposal of a new direct tax code (believed to be a complete overhaul of existing Income Tax law) that is being proposed to be introduced in the next couple of months.

Readers may be appalled to know that 100-200 amendments are carried out to the Income Tax law every year during the Budget. On this basis, one understands that we must have carried out in excess of 7,500 amendments since 1961, when it was enacted, mutilating the original text beyond recognition.

If this is the state of Income Tax Act, the less said the better about Excise, Customs and Service taxes where wholesale amendments are carried out virtually on a daily basis through notifications, each one ending up confusing and confounding the tax payer endlessly.

Needless to emphasise, should a taxpayer fail to keep track of these amendments on a daily basis and alter his business according to the whims and fancies of the tax administrator, it could result in a disaster of Himalayan proportions. The art of today's business is the science of keeping track of tax amendments.

Retrospective amendments: Heads I win, tails you lose!
And despite all this, should you win your arguments with the tax department even at the highest level, viz., the Supreme Court, chances are that the law would be amended retrospectively to nullify the ruling of the Hon'ble Supreme Court. It is the sheer contempt of the administration for the Supreme Court, plain and simple.

It is indeed strange that in these days of a raging debate in the country on the balance between judicial activism and rights of the legislature, the issue of retrospective amendment in tax statues is not getting the attention it deserves.

In this connection, it may be noted that this year's Budget amended a provision in the Income Tax Act on a retrospective basis since 1976, thereby overruling a Supreme Court decision. One is indeed tempted to quote the irrepressible Ram Jethmalani, who -- albeit in a different context -- said, "They would declare a self-acknowledged prostitute to be a virgin with retrospective effect."

It is prayed that the Hon'ble Supreme Court take cognizance of this article as a public interest litigation of a pro bono publico and refer its earlier decision approving such retrospective amendments to a larger Constitutional Bench and declare the same to be unconstitutional.

Altering the rules of the game after the results have been declared is something peculiar only to our government.

In fact, this convoluted state of affairs is an administrator's delight and a goldmine for tax practitioners, but nightmarish for a taxpayer. After all, when officers at ground level indulge in quixotic reasoning and perverted interpretations while government backs the tax departments with atrocious and retrospective amendments with little or no demonstrable will to remedy the situation, can one hope for anything better?

Like standing inside a bucket and simultaneously lifting it
Obviously, what compounds the problem created by a fundamentally flawed tax law is that there are a very few honest, efficient and sympathetic tax officers left within the tax administration. In fact, one has a better chance of spotting a tiger in the Sariska or the Ranthanbore than spotting such an officer within the tax administration in this country.

Like most other institutions of independent India, tax administration too has fallen to pathetic levels, especially in the last decade or so.

Simultaneously, one understands that tax administrators, of late, have been virtually terrorizing assessees with their discretional powers to scrutinise, reopen assessments, disallow legitimate deductions and impute non-existent income on hapless assessees.

The dilemma of the assessees when confronted with a 'demand' from the assessing officer would put Hamlet to a critical test. For should he not 'settle' with the officer at the lower level, he could well end up 'settling' at a higher cost with a superior officer on appeal.

More importantly, till such issues are settled, apart from losing his peace of mind and the increased cost of settling the issue, the assessee has to incur costs of engaging his counsel.

What is distressing is the fact that while our jurisprudence is built on the fundamental premise that one is innocent till proved guilty, the way the Income Tax law has been amended in recent times and administered, one gets a feeling that this fundamental principle is being completely turned on its head. More often than not one gets a feeling that the department presumes an assessee to be guilty till it can no further get after him.

Often it is stated that death and taxes are two things inevitable in life. But there are many who have begun to believe that of the two, the former is preferable. At least, there is one advantage about death: being a one day affair, it does not get worse with each passing day like taxes.

And it is only the government that can clean up this mess. However, it is unfortunately incapable of dealing with the extant situation, and neither have they demonstrated any will in addressing this crucial issue of cleaning up the mess in tax administration.

Given this sorry state of affairs, improving tax administration is as difficult as standing inside a bucket and lifting it simultaneously.

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Last modified on Sunday, 07 July 2013 07:36