In the Budget for 2024-25, Union Finance Minister Nirmala Sitharaman had announced a comprehensive review of the Income Tax Act, with an aim to make it concise, lucid and easier to understand.
According to Sitharaman, with these reforms, the Finance Ministry aims to reduce disputes and litigation, providing tax certainty to taxpayers.
While all of these goals are commendable, the key question is whether the procedure being followed will achieve the desired results.
In line with this announcement, the Chairman of the Central Board of Direct Taxes (CBDT) said that an internal committee of the Income Tax Department has been set up to review the redundant clauses and adopt global best practices to simplify the Act for taxpayers.
The group is also looking into removing redundancies and identifying obsolete clauses that can be removed. It aims to find the “best way forward” to implement a new direct tax law for the country.
While the objectives of this exercise are laudable, past experience does not offer much hope. Many such committees were established (some comprised solely of tax officials, while others included both experts and officials) but the recommendations were rarely implemented.
Committees made up of outside experts and tax officials had produced some of the most comprehensive reports, but their excellent suggestions were rarely implemented by the government.
On the other hand, internal committees created for this purpose often produced recommendations that favoured the tax department and focused only on overturning decisions that went against it, but did not address the issues comprehensively.
This was probably due to the committees’ lack of practical experience with the challenges faced by businesses and individuals in complying with tax laws. In addition, the suggestions reflected a bias of tax officials, who often viewed taxpayers as evaders and prioritized revenue maximization.
Unfortunately, many recommendations were accepted and implemented, increasing the compliance burden for taxpayers and leading to more litigation.
If the government really wants to create a balanced law that limits tax evasion and facilitates compliance, while being fair to genuine taxpayers, it must involve retired judges, experts, companies, professionals and individual taxpayers with a deep knowledge of tax laws.
These stakeholders should be included in both the committee and the consultative process to ensure that the resulting suggestions facilitate the development of world-class tax legislation.
We have the necessary knowledge and experience both inside and outside the tax department. The key is to achieve a fair balance between the two, starting with the composition of the committee.
One argument against a consultative process is that the December deadline set by the finance minister may not allow enough time for thorough consultations. However, the priority should be a truly balanced tax law, which can only be achieved if all stakeholders are involved.
Perhaps the need to implement changes in the next budget required such a short time frame for this task. However, it will be much better to ensure a comprehensive approach rather than a hasty, half-baked solution that may not be effective in reducing litigation.
We can only hope that this aspect will be taken into account and the process will be modified accordingly.
Another aspect to consider is whether frequent changes in tax laws have made them more complex and litigation-prone. Even a well-written law can become unfair and complicated if the government and the tax department continually amend it to plug every loophole, even when the misuse is minimal.
Therefore, could there be a committee of internal and external experts to assess whether such amendments are really necessary each year before they are enacted?
In conclusion, a fair, simple and balanced law can only be achieved if there is a change in the mentality of those responsible for suggesting the changes, both now and in the future.
Gautam Nayak is a Partner at CNK & Associates LLP.
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