Tax department should not issue notices indiscriminately
The latest dispute between the Income-Tax Department and some assessees is a good example of the difference between the intent and implementation of reform measures. Several individuals and firms have filed petitions in various courts challenging the tax notices issued during the April-June period. The law was amended earlier in the year, and allowed tax assessments to be ordinarily reopened for the previous three years. In cases of serious fraud and concealment of income of more than Rs 50 lakh, assessments can go back 10 years. However, the income-tax department extended the validity of the old law till June 30, which allowed reopening assessments up to six years and issuing tax notices to a large number of assessees.
The tax department has argued that it extended the old law due to the second wave of Covid-19 and it is in line with the extension given to assessees in terms of compliance. The government is also reportedly exploring the option of bringing in an Ordinance if courts rule against the validity of the notices issued by the department. The government will be well advised to avoid any such step as it would go against the basic spirit of amending the law and reforming the tax administration. The objective of amending the law was to provide relief to taxpayers by reducing the scope of reopening tax assessments for previous years. Thus, extending the old provisions for three months reflects the difference between the letter and the spirit of the law. However, this disconnect is not very difficult to understand and is a result of deeper fault lines in the Indian tax administration.
India’s fiscal situation has been under stress for years and the pandemic has only worsened the problem. The basic issue is excessive pressure of targets on tax officials to increase collection to meet a target. This pressure results in tax notices, delays in refunds, reopening previous assessments, and disputes. Direct tax revenues blocked under litigation are estimated to be over Rs 9 trillion and the government has settled cases worth about Rs 1 trillion under the Vivad se Vishwas scheme. The fact that a large number of taxpayers who are contesting the tax department’s claims in courts didn’t come forward to settle suggests that they have a strong case.
To be fair, the government has implemented a number of reforms in the recent past, such as systems for faceless assessment and appeal, which will help bring more transparency and reduce harassment. The changes in the law to reduce the scope for reopening assessments were in the same spirit. But to genuinely improve conditions for taxpayers, the top leadership will need to set realistic tax revenue targets and stop putting pressure on tax officials to increase collection, so that indiscriminate issuing of notices and litigation are avoided. This is not to suggest that the tax department should not go after those evading taxes, but it would need to be more focused. This will require building more capacity in the department by using technology, which will enable it to approach the right assessees. At the macro level, to increase revenue, the government would need to broaden the tax base with better use of technology. It would also do well to reconsider the exemption limit for personal income tax. Chasing the same set of taxpayers with notices and extending an old law for a few months would not take the government too far.