Financial Times

Another major fall back in the tax policies and legislation is that the two does not go hand in hand with each other. In the new tax reforms although there were many far reaching measures taken by the government in terms of tax payer compliances, protection and recognition the legislation has in many instances fallen behind.

Under the new reforms in the administration of the Inland Revenue department the possibility of repeated audits and fraud have increased and the pyramid of hierarchy has now turned upside down making the top heavy with a large number of deputy commissioners but not enough support staff, tax experts say.

According to reforms under the budget, in terms of rationalizing the administration of the Inland Revenue and the customs, a larger number of cadres has been provided to the senior officers. “The idea was to delegate authority, however what has happened really is that the top has got heavy; there are 92 deputy commissioners and the officials are changing positions, which has resulted in repeated audits. This is never ending harassment for tax payers,” said N. R. Gajendran, partner of GAJMA & Co Chartered Accountants in a recent interview.

He said this situation further complicates the processes of the department and with the recent (VAT) scams the officers are not prepared to make decisions with the attitude that ‘if one doesn’t do the work he cannot be found fault with.’

Under the new law the assessors’ powers have been reduced making it necessary to obtain specific authority to assess from the superiors. This measure was taken with the aim of applying more control over the assessors’ functions. However the present situation is that the assessors’ role has become sidelined and the matters have been further complicated with most assessors becoming deputy commissioners.

Gajendran said that under the reforms and modernization of the department one officer is in charge of all functions of a single tax file such as assessment and collection which gives ample room and creates breeding grounds for malpractice. “Earlier the assessment was done by one officer and the collection was done by another but under the present system it is all under one person; this is a basis for malpractice,” said Gajendran.

The increased cadre and the officers should focus more on broadening of the tax base, not duplicate work. The Inland Revenue Department should try to encourage more people to pay taxes. The department should focus on drawing small tax payers to pay income tax. “If the officers ask the small income earners to pay, even if the three wheel owners are asked pay Rs 5,000 or 7,000 per annum, people will pay. People don’t like to pay VAT because they feel cheated but they wouldn’t mind paying income tax if not they feel guilty,” said Gajendran. According to him the broadening of the tax base could have more benefits than increasing government income.

When people pay taxes the stakeholdership will go up and people will express their views and a sense of ownership will build up. “ The politicians cannot mess or fool around then, now people keep quiet because they don’t own this society as people don’t contribute, but this will change if they contribute,” said Gajendran.

One such instance is when the government policy has facilitated new small tax payers by saying that if a person with an income of less than one million opens a file the department will accept the return without assessing the accounts. However the legislation complicates this by saying for a person to be eligible for this benefit the person or his or her child should not have had been asked by a deputy commissioner to file a return. This situation is further complicated as the legislation requires the tax payer to even pay a penalty for the previous year as well. “This should not be the case as small tax payers should be encouraged not discouraged,” commented Gajendran.

Another loophole where the legislation is falling short of the policy is when the tax payer pays 20 per cent more than the previous year or when the assessable income is 25 per cent more than the previous year the returns will be accepted by the department if the tax payer produces an affidavit stating that he has not evaded tax. However the legislation in this regard complicates matters by bringing in another condition saying that for the past three years the payer should have complied with the law. “This is not in the policy pronouncement of the government. Complying with the law has a very broad interpretation, if a tax payment is delayed by one or two days that is also considered as not complying with the law.

This intervention to the policy virtually negates the policy,” said Gajendran. Further the policy says this privilege is available from assessment year 2005/ 2006 but the legislation does not allow this even though the budget proposal categorically allows this. One more significant proposal in the budget was that if the tax returns one paid one month before the due date the tax payer would be given a 10 per cent discount on the amount paid. However under the legislation only the quarterly payment is covered but not the final payment.

This is not practical as making a hundred percent accurate estimate on the current year’s tax liability is not possible and the only option available for the tax payer to obtain this benefit is to over pay in the first two quarters. The proposal was simple but the legislation has complicated it, he said.

“The reason for most of these complications and scaling down of the policies instead of broadening is because the drafters of the legislations are from a revenue background. They are basically collectors but policy making and legislation should be different from administration. The legislation should give affect to the policy not cause interference,” said Gajendran. However he admits that this budget proposal has given much prominence to the tax payer compliance, protection and recognition than it has done in the past.

This budget offers 25 percent reduction on all custom duty taxes in importing a 1500cc vehicle if the tax payer has paid more than Rs 250,000 per annum for five years. “Generally the duty free is for politicians but this time they are giving it to the tax payers as well; this is an indication they want to recognise the tax payers as well,” Gajendran commented.