The Hindu Business Line : Annul the annual amendment activity

All changes to the laws have since been made through the annual Finance Acts, creating numerous problems for taxpayers, tax collectors, tax consultants and various others dealing in tax laws.

The magnitude of the changes made through the Finance Acts can be gauged from even in the Finance (No. 2) Act, 2004, which has 121 sections and a schedule relating to income-tax in four parts and running to 17 printed pages. Of the 121 sections, 64 are on income-tax and one, wealth tax.

In fact, among the 64 sections on income-tax, one of them — Section 30, that is — has a new Chapter XIIG on shipping companies, which contains a further 30 sections — 115V to 115VZC.

Likewise, there is a separate Chapter VII in the Finance Act relating to the securities transaction tax, which has 20 sections — 96 to 115.

Similar exercises have been undertaken in the past as well. But what is worrying is that this situation seems likely to continue.

The likely scenario

While presenting the Budget for 2004-05, the Finance Minister, Mr P. Chidambaram, in para 95 of his speech, stated thus:

"I am a votary of tax reforms, but it would be unwise on my part to attempt to do tax reform in a hurried or piecemeal manner. Seven months from now, there will be another Budget, and there will be an occasion to visit the subject of tax reform."

Thus, next year's Finance Act, too, is likely to be loaded with numerous provisions to reform the tax law.

Should tax provisions be introduced through the Finance Acts? The answer to this has to be in the negative for the following reasons:

The drafting of Finance Bills are time-bound, as the Budget is presented in Parliament on a pre-fixed date;

The Budget exercise is carried under cover of secrecy and `out of bounds' for the public, and no discussions can be made with Finance Ministry officials during the Budget-making period.

Hurried pieces of legislation pushed through in the Finance Bills have resulted in a number of mistakes.

That the Finance Acts often lack clarity have been recognised by Finance Ministers themselves.

For instance, Paragraph 153 of Budget Speech 2000-01 reads thus:

"Last year, my proposals on corporate restructuring were widely welcomed by Indian industry. However, there have been persistent demands to clarify and rationalise some of the provisions.

"I, therefore, propose to remove ambiguities in this regard by making suitable changes in the provisions of the Income-tax Act."

Obviously, such a situation arose because enough thought could not go into all the relevant aspects owing to the paucity of time.

And Paragraph 154 of the same year's Budget speech states thus:

"Last year, I had dispensed with the condition of continuity of the same business for carry forward and set off of loss. I propose to liberalise the provisions relating to carry forward and set off of unabsorbed depreciation on the same lines.

"The condition of continuity of same business will be dispensed with and unabsorbed depreciation may be carried forward and set off even if the same business is not continued."

This situation could have been avoided if a consolidated view had been taken.

Even with regard to the Finance (No. 2) Bill, 2004, the Finance Minister was required to move 55 amendments, which touched upon half the total clauses. This is not a happy situation.

The way out

It is time that the practice of bringing important amendments through the Amendment Acts, prevalent in 1980s, was revived. The changes required to be made to the income-tax law can be broadly categorised as:

a) amendments of a technical nature; and

b) amendments that are strategic or requiring policy decisions

A `technical amendment' means a change in tax law which reflects no substantial re-examination of tax policy.

The existing tax structure is not changed, but the wording of particular provisions is, say, altered somewhat to implement the underlying policy better.

A technical amendment may be necessary because:

the original law opened an unintended loophole;

a judicial or administrative interpretation of the law has given an unexpected result;

the original law is unintentionally harsh on a particular taxpayer or group of taxpayers;

a change in the procedure for reporting information is desired;

the law as passed contains a drafting error; and

changes having short-term impacts are required; only such changes should be introduced through the annual Finance Acts.

`Special changes' are need to:

meet the government desires to make a strategic change in the existing Act; for example, increase or reduce the taxable entities;

change the system of assessment, as in the case of shipping companies by way of tonnage tax;

bring in concepts which hitherto were not embodied in the Act — such as the provisions to tackle the problem of transfer pricing;

address the emerging situations caused by external factors such as globalisation, liberalisation, and so on, by providing tax benefits to encourage reorganisation or restructuring of the corporate sectors, attract foreign investment, and so on;

introduce provisions which deviate from the generally accepted principles of commercial accounting and notions of tax equity; deemed concealment as suggested by the Tax Expert Group of 1996, for instance; and

achieve non-tax objectives, such as development of backward areas, infrastructural facilities, and so on, even if they mean sacrificing tax revenue.

The enactment of special provisions, in some cases, can affect other departments. It may involve foregoing tax revenues and examining the suitability of the tax system to meet challenges such as administrative feasibility.

Hence, these require deeper examination and should be brought into the tax law only through Amendment Acts after thorough discussions, if necessary, by parliamentary committees.

The introduction of such provisions through the Finance Acts has created numerous problems, leading to multiple amendments and litigation.

Section 4 of the I-T Act talks about a Central Act which, prima facie, refers to the annual Finance Act, which has to be mainly concerned with prescribing tax schedules, tax brackets, basic exemption limits, and so on.

Some amendments of a technical nature can be routed through such Acts.

But strategic changes and amendments of a fundamental nature should be done only through Amendment Acts. This would ensure smooth functioning of the tax system.

(The author is a former chairman of CBDT.)