The development of a nation is measured by Gross National Product (GNP) or Per Capital Real Income (PCRI). The above two are the economic indicators used to measure the economic development of a nation. There are non-economic indicators which are of very import to measure to evaluate true development of a nation. Culture, civilization, human values, education, health, sanitation, nutrition etc. are the other dimensions of recent origin and they are measured using the indicators such as Physical Quality of Life Index (PQLI), Human Development Index (HDI), etc. A nation with a high economic success conversely with improper governance and lack of civilization of citizens will perish sometime.
The taxation system is a tool for economic development and tax collections are the major source of revenue to any economy. Though tax collections are major source of revenue to government, it keeps factors such as balanced growth, redistribution of income and wealth, promotion of industry, creation of employment, encouraging capital investment etc., through its tax policy. Thus, the tax policy of a nation is extremely vital to its all-inclusive growth. The taxes so raised will be utilized for various welfare measures and development of the nation. Just for the purposes reducing litigation or for prompt resolution of disputes, the simplification of tax law may be the solution, but have its adverse effects. Such simplification leads to removal of various incentives and encourage a flat tax levies.
Reducing the inequalities in wealth and income among its citizens is one of the main objective of any developing economy. One of the essential characteristics of any tax rising policy is ‘the ability to pay’. As the taxes are of two types, namely direct and indirect taxes. In case of indirect taxes, they are to be borne by the consumers of goods and services irrespective of their financial ability. On the other hand, the direct taxes are lesser burden than the indirect taxes to the common people as they are payable on income or profits rather than on goods or services. Direct taxes facilitate in more equitable distribution of income and wealth. On simplification of direct taxes, it shall not loose progressive nature.
It is the legal system of a nation which determines rights and liabilities of its citizens. The law alone can bring the public under its purview liable for tax payments. Hence, taxes are levied and collected from the public by enactment of Tax laws, under which a tax administration authority plays a formal role in collection of taxes from the taxpayers, requiring them to pay to the authority a part of their income or wealth. The power to impose taxes is generally recognized as a right of governments. The tax law of a country depends upon its economic policy, though there are similarities in the laws of various countries, each law is unique to it. In India the power to tax is conferred to both Central and State Governments by the Constitution of India.
Tax law being a law is concerned with the legal aspects only. That means, the legal interpretation does not change, based on financial or economic implications, or on the other aspects. The imposition of various kinds of taxes and its rates does not fall into the domain of tax law; it is the will and power of the legislative.
Tax law may be divided into material and formal. The material law comprises of the legal provisions giving rise to the charging of a tax; and formal tax law comprises of the provisions relating to tax administration, assessment, various procedures, appeals, and other similar matters.
The inherent nature of any law is that its contents are subject to judicial interpretation and are vulnerable to litigation in any democratic country. There is a lesser amount of litigation in case of indirect taxation, but the litigation is more in case of direct taxation.
Every fiscal year brings a plethora changes to the original enactment of tax law through the finance bill introduced in the budget proposal relating to the taxes on income and property. The original tax structure was lost now and has become very intricate to grasp it by the tax payers, accountants, tax administration authority, judiciary etc. This led to a situation of high administrative cost to the government and compliance burden to the tax payer. A tax payer construes the current tax law of the country as twisted in view of complex nature of computation of his tax liability considering several exemptions or deductions, though such exemptions are the welfare measures for the benefit of the tax payer.
To simplify the tax laws, the rates of taxes to be moderated without losing the revenue by enhancing the tax base and tax compliance by the tax payers. In the first step, the material part of tax law should be restructured by reducing or altogether eliminating the incentives and exemptions which distort the tax law greatly without affecting progressive nature of tax policy.
Removal of incentives and exemptions will have a few positive consequences apart from simplification of tax law. They:
- result in a higher tax-GDP ratio;
- enhance GDP growth, since tax exemptions and deductions distort allocative efficiency; and
- reduce compliance costs, lower administrative burdens, and discourage corruption.
Apart from simplification, the other problem is ambiguity in the law, which facilitates tax avoidance. Altogether introducing a new tax law is a solution to this problem.
The efficacy of a taxation system relies on facilitating voluntary compliance by tax payers and measure to reduce the scope of disputes. In simple words it shall,
i. avoid ambiguity in the provisions that invariably give rise to rival interpretations;
ii. be compliant to the changes of a growing economy without resorting to frequent amendments except for changes in exemption limits or rates of taxes, etc.;
iii. consolidate provisions relating to definitions, incentives, procedures etc.; and
iv. be based on well-accepted principles of taxation and best international practices.
The reason for the current chaotic situation of the Tax law attributable to perception or the mind set of tax payers as well. India being a developing country comprising of people with varied economic and social backgrounds, their unmet material needs is a major hindrance to obey the tax law and they sense it as a burdensome instead of looking it as a statutory obligation. Hence, the people are most unwilling to pay the taxes, especially income tax, as they feel the tax payments are snatching their little savings.
Every time the tax payers try to escape the tax liability by playing with loopholes, the government on the other hand changes the law to entangle them within clutches of taxation. In the process, the tax law has become more cumbersome and complicated. To reform the tax law, the Government of India has constituted several committees including Tax Reforms Committee headed by Dr. Raja Chelliah, Kelkar Task Force on Direct and Indirect Taxes, and Shome Committee on Tax Policy and Tax Administration for the Tenth Plan.
Income Tax Simplification Committee was formed with a view to simplify the provisions of the Income Tax Act, 1961, vide Notification dated 27th October 2015 to:
i. study and identify the provisions/phrases in the Act which are leading to litigation due to different interpretations;
ii. study and identify the provisions which are impacting the ease of doing business;
iii. study and identify the areas and provisions of the Act for simplification in the light of the existing jurisprudence;
iv. suggest alternatives and modifications to the existing provisions and areas so identified to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection.
This committee has been formed by having bureaucrats as well as experts in law and accountancy. This seems to be the perfect combination ever had to make the tax reforms. The committee recommended very sensitive issues and the finance ministry has considered most of them either as it is or with a few modifications.
Measures taken to phase out deductions:
The Finance Minister indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions. The Government proposed to implement this decision in a phased manner.
Conclusion
Simplification of taxation law in particular, direct tax law was an unfulfilled dream to any past finance minister. Applying the tax laws equally to all the assessees with a single rate of tax makes the law simple but such an action is not justified keeping in view of the varied economic backgrounds, the age and health of the individual, his / her family and dependents etc. There are more than 160 amendments brought through the Finance Bill 2016. Such a great number of changes not only indicate outliving of the existing tax law but also indicate non-conformity of the law to growing needs of our economy. However, these amendments seem to be sensitive enough to minimize scope of litigation. As a beginning of tax reforms to reduce disputes, the discretion as to levy of penalty has been removed and so many other important changes were brought in. It is a welcome change to tax reforms.
Last but not least, the corporate and non-corporate tax law shall be separated.
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