Financial Times

Tax cluster needs to change tax culture
Hip, Hip Hurrah, For the Prince of the Treasury! His initiative in appointing a tax cluster comprising of officials, tax professionals and private sector representatives must be commended. Even more laudable are the terms of reference set for the cluster.

To examine in detail all tax legislation and ensure that these enactments correctly represent the intent of the tax proposals and are practical in compliance and enforcement, to ensure timely enactment, publication of practical guides for tax payers to follow, to consolidate and codify tax enactments and make recommendations for tax policy reforms are amongst the noble objectives.

A much-desired missing link is now established, without which the officials ruled the roost, tax legislation was always late, rules made by newspaper notices, impractical and unjust provisions were enforced by law. In addition, a forum for the Chambers and the tax professionals to make submissions for a professional review (rather than a cursory glance by dogmatic officials and the ST) is now in place.

There are high expectations from the cluster and the first news of progress is heartening.The cluster had cleared the VAT legislation in time to be passed by Parliament on the last sitting for the year.

Their initiative however was of no avail with the translations not being ready in time. A little bird whispers however, that in preparing the VAT legislation, the practical issues likely to arise in the administration of the multiple rates, the likely non realization of the expected lower consumer prices from the 5% rate band due to input credit being disallowed and the economic and fiscal results likely to emerge had been glossed over.

Will some of the critical policy reforms announced in the budget 2005 with likely negative long term impact be adequately debated before the new tax legislation is tabled in Parliament and legislated prior to the new tax year? Or will the form take over the substance and only clarity of legislation be assured? Taxpayers earnestly wish that a debate on the desirability of the announced policy reforms will precede the review of the legislation.

The desirability of policy reforms relating to an add-back of valid commercial expenses, including advertising, foreign travel, entertainment etc, must be re-examined and the underlying rationale justified. Similarly, the rationale for taxing charitable institutions not on their genuine business income, but instead on a presumptive share of donations received (perhaps even including goods and technical services received) requires justification.

If these reforms were included not merely to satisfy the ego of the Rathu Sahodarayas', but in the genuine belief that a part of these expenses represent personal or non commercial expenses, then the cluster must explain the provisions already available in the tax legislation to disallow any such expenses (where arms length independent nature cannot be established and also where there is doubt on the justification as a genuine commercial spend).

If the decision to disallow in part or full the expenses was with the intent of raising tax revenue, an alternative could be a marginal increase in the tax rate. The importance in the longer term of converging tax accounts and financial accounts and adopting the net income concept must be debated and pursued by the cluster.

Will the cluster be able to change the tax culture and convince the tax officials to establish a disciplined approach in raising tax revenue without harassing genuine taxpayers? Will tax officials hereafter be influenced to accept legitimate tax avoidance schemes (provided they do not amount to tax evasion)? Can a practical methodology in expanding the tax net be agreed without asking the private sector (especially banks and financial institutions), to produce generic data on clients and their transactions (which practice is undesirable, against applicable client confidentiality regulations and above all against the competitive interests in valuable data bases)? Can they also try to develop strategies that collect the taxpayer information at the inception of transactions by clients' own declarations? Can a genuine system of self-declaration and professional tax audit systems be agreed? Can records management systems within the tax department be improved and the validity of determinations enhanced thus ensuring that taxpayers who have genuinely paid taxes and complied with the legal requirements are not harassed? Can the proposed taxpayer charter be not one sided in both development and application?

The 1998 movie of the Charles Dickens novel " Great Expectations' directed by Alfonso Cuaron, advertised with a tag line " Let desire be your destiny" had reviews like, "confusing and not what I expected, I expected a lot more, watchable but mediocre ". Let not the 'great expectations' of the taxpayers of the tax cluster have a similar review.

(The writer could be reached at - wo_owl@yahoo.co.uk)

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