Is the government unleashing a new tax extortion regime by asking for more details about assets and liabilities from the rich and those who are well-off?
When the National Democratic Alliance (NDA) came to power, it showed promise in its early days, what with some bold policy decisions to improve the government’s tax extortionist image. It announced it would not resort to retrospective taxation, decided not to appeal against a high court decision in favour of Vodafone in a transfer pricing case, and made a slew of small changes to make paying taxes and filing return easier and simpler.
And when it announced the formation of a panel on simplification of tax laws and implemented 17 out of 20 of its recommendations, everyone thought we are finally moving in the right direction making the country’s tax laws more business-friendly and amenable to taxpayers.
Of course, there were some minor hiccups — the mindless Black Money Act and the controversy on applicability of minimum alternate tax (MAT) on foreign institutional investors (FIIs). Experts and tax commentators brushed aside these “mistakes” as mere anomalies.
However, when we thought the government is working overtime to make India a non-adversarial tax regime, the government surprised us all with some inexplicable policy moves.
Even as the ghost of Black Money Act was not far behind us, the government recently announced that people with over Rs 50 lakh annual income must disclose in their income tax return assets such as cash in hand, jewellery, bullion, yacht, vehicles, aircraft and immovable properties.
The focus of the government obviously is more disclosures in income tax return (ITR) form, so that it can catch those who are purposely showing lower income to avoid tax or are earning income disproportionate to their assets.
While the objective of the move may sound lofty — given the government’s commitment to curb black money — implementation of the law may be a big problem area. How do you value a certain asset, say a yacht or a luxury car? What if your valuation of assets is rejected by the income tax department? Would it open another Pandora’s Box and lead to more tax disputes? Through this law, is the government handing more subjective power in the tax officers, who for long have been known to spook honest taxpayers? The most important question though is whether the government is unleashing another round of tax terrorism.
The government’s defence to the accusation of resorting to aggressive tax rules is rather lame. Revenue Secretary Hansmukh Adhia said the new law would only affect 1.5 lakh tax payers and not impact the common man. Somebody must tell Adhia that bad tax laws often find favours with the government and before long the threshold of Rs 50 lakh may be lowered to encompass more taxpayers.
And if we look back, and try to connect the chains of some of the aggressive tax policies of the government — last year it made it compulsory for taxpayers to disclose foreign assets in ITR forms — we will realise this government, in its zest to “unearth” the treasure trove of unaccounted money stashed abroad by unscrupulous taxpayers, is unleashing another era of tax terrorism.
Of course, the government gets a moral boost when exposés such as the recent Panama Paper leaks reveal a long list of Indians with overseas assets and investments. What news reports like these do is create sensationalism, often at the cost of facts and generate public outcry to make stricter laws against individuals and entities who open companies and trusts overseas. However, lost in the midst of rhetoric and public outcry is the fact that people can, in fact, legally open companies or own assets outside India. Both the Reserve Bank of India (RBI) and the tax authorities offer tools for individuals and companies to own companies overseas, and people using these tools should not all be seen with suspicion.
The information revealed in earlier such exposés have not led to any meaningful prosecution, and the recent one is unlikely to lead to any significant discovery of black money stashed abroad either. In a similar exposé in 2013, 700 Indian names appeared in a list of people, with business connections in overseas countries. In this case so far, only 52 prosecution complaints has been registered and the tax department could detect a credit of only Rs 2,000 crore. The Enforcement Directorate is investigating only 20 of these cases.
There are other tell-tale signs of the government’s aggressive tax policies. It has issued fresh tax demands on Vodafone and Cairn — the two companies that were earlier hit by the UPA government’s tax extortionist ways. The government has even decided to appeal against a Bombay High Court decision in favour of Vodafone in the Rs 8,500-crore transfer pricing case (different from the case mentioned earlier).
Defending the appeal, Finance Minister Arun Jaitley said the government thinks it is an appealable order and, therefore, there is no reason why it should not appeal against the case. Although he reiterates that the appeal has nothing to do with retrospective taxation, the government has actually brought back the days of retrospective taxation unleashed by the previous government.
After the earlier enthusiasm the government showed in addressing the tax woes of businesses and the common man, it seems it has now come to terms with the hard realities of the country’s limited revenue resources. With a low tax base and poor tax- GDP ratio of 9-10 per cent (compared to 15 per cent for Brazil and Russia, and 25 per cent for South Africa), the government of the day has always faced serious resource crunch and to fill the revenue shortfall it end up squeezing those individuals and companies which are already paying taxes.
The right way, though, is to make efforts to increase the tax base of the country, bringing millions of people who go untaxed into the tax net. While this is a long-term solution, what bothers taxpayers is the government’s short-term solutions.
Given the government’s slow and steady change in its tax policies, we can say that tax is something you cannot trust with any government. Irrespective of who is at the top, you would be sure that the government is there to squeeze every penny of tax it thinks you owe it.