How to build a robust Indian fiscal system?

Off late the vagaries of the Indian tax system has been blamed to be one of the reasons behind a sluggish growth in the Indian economy. There is a lack of trust, fear and uncertainty. A recent development on FII taxation is just another example of what ails our system. Laws, which are in place for decades, are still being interpreted in different ways. There continues to be a considerable gap between law administrators and companies. There is plentiful litigation. The question is: how will this change?

To my mind the core of fiscal system is the law. If the law is uncertain or not clear or keeps changing too frequently, one can rarely have stability. It is not anybody’s case that law needs to be precise and should provide for all situations but following steps taken toward getting the core right should improve the tax climate quite significantly.

Circulate the draft law for comments before its rolled out

Currently, the substantial amendments are introduced during the annual finance bills with memorandum explaining amendments. Though suggestions are sought and in some cases the rigors of the law enacted is softened but the structure of amendments introduced remain the same. As compared to this, it is important to introduce the tax change to the public and seek comments. This will help the Government to get a wider perspective of how the proposed change is likely to impact different stakeholders and make changes to fill the gaps in the proposed law.

Reveal the intention

Any change in the law should come with detailed explanation outlining the intent of the change. Revealing the intent will not only help tax payers and but also tax administrators and reduce the chances of litigation. This will help tax payers understand the nuances quite clearly though they can share their concerns about the unintended and often very damaging consequences due to the way the law is worded. Different stakeholders can also suggest changes in the drafting of the law without diluting the intent behind the change introduced. Moreover, in case when the matter travels to Courts for interpretation, the intention disclosed is likely to serve as a very powerful aid for interpretation.

Illustrate the intention

To ensure that there is no doubt in the way the new law needs to be applied in different situations, it is critical that the rationale of the change is clearly explained with suitable examples. These examples should cover different scenarios relevant for the law being illustrated particularly where ambiguities can arise in the future. The practice currently being followed, at least for income tax. is to explain the provisions through annual CBDT circulars. These circulars actually are not sufficient and offer very little guidance to clarify the provisions.

Share comments with public

Any comment given should be shared with rest of the stakeholders. This is an important step in bringing the awareness. This exercise also reveals the varying possibilities of how different parties see the new law impacting their specific situation.

Share how the suggestions have been considered while finalizing the law

Year after year several recommendations or suggestions are given by various stakeholders as a part of pre-budget exercise. Some of these suggestions are incorporated while others are left out. There is no clarity as why some of the recommendations were not incorporated. Once these proposals are tabled in the parliament, the focus shifts to new proposals. The recommendations given earlier by various stakeholders lose its significance. The Government could share how the suggestions were considered in drafting the law. It is not important that each and every suggestion or comment given by every stakeholder needs to be commented upon. What government could do is to basket the comments in different categories and comments could be shared against that. If the changes to the originally introduced proposals are material, it might not be a bad idea to lay down a second draft and seek comments again from stakeholders.

Avoid making any retrospective changes in the law

The Government has received considerable flak for making retrospective changes in the law. The justification is that courts’ interpretation of law is not in accordance with the intention when the law was originally introduced. Hence. to remedy the defect the changes need to be made with retrospective effect. It is not a healthy situation. Parliament is empowered to make changes and there may be genuine reasons to do so. However, to get the confidence of the investors, the changes should not be made with retrospective effect. All changes need to be introduced from prospective basis in no uncertain terms. There should be no doubt that the change will apply on go forward basis.

 There are several other measures that can be incorporated in the fiscal legislation to ensure we have a robust fiscal system. These measures could be no penalty to be initiated on issues relating to legal disputes, particularly when there are two conflicting judgments on those issues — equality of interest rate to be paid or recovered by the government from tax payers, upfront outline the data required during audit process of tax returns, with the rationale of seeking that data; the audit process to happen only through email; system of prior approvals for transactions which can potentially lead to leakage of tax revenue and more. However, as always, one needs a strong political will to achieve this.

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