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“There’s Need for a Trust Based Taxation Regime”
Nishith Desai, International Tax & Corporate Lawyer
Issue Date - 21/07/2011
‘Trust’ seems to have become a rare commodity today. While the developments surrounding the Lok Pal Bill and corruption have created quite a stir nationwide, the Direct Taxes Code (DTC) Bill also provokes one to contemplate on the declining standards of trust in the world’s largest democracy. The DTC, proposed to be implemented from April 1, 2012, is currently being scrutinised by the Parliamentary Standing Committee chaired by Yashwant Sinha. Once enacted by Parliament, it would completely replace India’s existing direct taxes framework.

Before delving into some of the provisions of the proposed DTC, it is necessary to first understand the relevance and importance of trust. Trust is a valuable social asset and forms the basis of democracy. The theory of trusteeship espoused by Mahatma Gandhi has application in all facets of governance, whether in corporate management or the tax administration system. Trust demands respect for the inherent value and rights of a human being. Policy framers and decision makers are regarded as trustees of the power vested upon them by the people and are bound by the strictest norms of transparency and accountability in the exercise of such powers. Such accountability emanates from India’s constitutional fabric which imposes numerous checks and balances on the functioning of the three organs of governance – executive, legislature and the judiciary.

A number of proposals in the DTC are antithetical to a trust based regime. Of these, the proposed General Anti-Avoidance Rules (GAAR) are likely to have the most critical impact on not only the sophisticated taxpayer, but the common man as well. GAAR provides wide discretionary powers to the Commissioner of Income Tax to tax impermissible avoidance arrangements lacking commercial substance. While some developed countries have introduced some form of a GAAR to curb tax evasion, the GAAR framework proposed in the DTC is vague and does not have sufficient checks to check abuse of power. Unfettered discretion may result in harassment of the average taxpayer. In fact, the proposed GAAR regime marks a shift from the long standing principle that taxpayers are allowed to legitimately minimise taxes within the four corners of law.

Contrary to principles of natural justice, the taxpayer is required to bear the primary burden of proving that he has not undertaken an impermissible avoidance arrangement. There seems to be an unfair presumption that a taxpayer is guilty of tax avoidance, which has been equated to evasion. The DTC also does not impose any time limit within which the tax authorities may invoke their sweeping powers under GAAR. The GAAR provisions also override India’s tax treaties, which is against the Government’s constitutional commitments and is not in sync with principles of international law. The application of GAAR is thus bound to give rise to unnecessary litigation and would create high uncertainty and hardship for taxpayers.

The lack of trust is also reflected in the proposed regime for imposition of penalties. Today, a taxpayer may be subject to penalties if he has concealed or filed inaccurate particulars his income. It is an established position that penalties are attracted only if the taxpayer has made a conscious attempt at evading tax. However, in circumstances where the actions of the taxpayer are bonafide or where there was reasonable cause, penalties cannot be imposed. However, the language in the proposed DTC suggests that penalties may be imposed automatically as long as the income assessed by the tax authorities is higher than what is disclosed by the taxpayer. It seems that factors such as the taxpayer’s true intention and bonafides may only have limited relevance.

Another matter of concern is the DTC’s lack of trust in the role of the Indian judiciary. The Discussion Paper annexed to the DTC states that the Courts have added to the complexity in the law because of various conflicting judicial pronouncements. It, however, fails to take into account the positive role played by Courts in providing a great degree of stability and certainty to taxpayers by laying down fundamental guiding principles of law, which is the essence of our common law system. The higher Courts have proactively checked abuse of powers and have reconciled the law with constitutional norms, thereby ushering the spirit of justice. The DTC however, without any express justification or discussion, seeks to overrule well-established judicial precedent on a number of issues where Courts (including the Supreme Court) have decided in favour of taxpayers. It would do well for the Government not to disregard the wisdom of our esteemed judiciary especially in cases where decisions are based on interpretations of principles of constitutional law.

If a government distrusts its people, people are likely to reciprocate by distrusting the government. For a trust based taxation regime, it is imperative that the DTC guarantees each taxpayer certain basic rights. These taxpayer rights, which are internationally recognised, include: (i) Enforcement of tax laws in a fair, equitable and non-arbitrary manner; (ii) Non-retroactive imposition of taxes; (iii) Certainty and stability; (iv) Guarantee against double taxation and good faith interpretation and enforcement of tax treaty provisions; and (v) Efficient redressal of tax disputes within a reasonable time frame.

It is time for us to accept that while “taxes are the price we pay for civilisation”, civilisation cannot sustain itself without trust.

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