An In-Depth Analysis Of Tax Terrorism In India And The Way Forward

Kartik Jain, LLB, Jindal Global Law School

ABSTRACT

India has a population of 1.3 billion individuals, yet the income tax-paying population stands at just 2 percent of the total population of the country[1]. Tax terrorism has plagued the taxpaying population around the country and has become one of the most vital problems India faces today[2]. This essay seeks to explore the concept of tax terrorism in India and the detrimental effect of such a practice on consumer and investor confidence in the country. Through an analysis of Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors.[3], this essay further seeks to examine the detrimental effect of tax terrorism on the Indian economy. Additionally, through an analysis of the Faceless Assessment Scheme, this essay will attempt to showcase the need for more research and ways to end the practice of tax terrorism for successful tax administration.

Introduction

Tax terrorism is a major problem for the administration of taxes in India, a country with an adversely low number of income taxpayers. The term “tax terrorism” was first coined by Prime Minister Modi during talks with the Federation of Indian Chambers of Commerce and Industry (FCCI)[4]. Compared by many as similar to violent terrorism, tax terrorism refers to the use (or misuse) of power by the taxmen of the country to extract more money than what is due from the honest taxpayer[5]. Oftentimes, through illegal means and misuse of current tax legislation in place in India, through extra pressure through legal means, the taxing authorities are known to extract more money than what is due or simply deny a refund for the over-compensation of taxes by the taxpayer[6]. The 2014 central elections were witness to a significant push by the Bhartiya Janata Party to eradicate the problem of tax terrorism in the party’s election manifesto[7]. Despite the importance given to the issue, the problem of tax terrorism remains one of the most important points of contention for corporates as well as the individual taxpayer in India. As the percentage of the tax under dispute exponentially rises, tax terrorism remains a relevant issue due to multiple reasons.

To understand the issue of tax terrorism, it is crucial to examine its causes and the problematic tax laws in place in India. Section 242 of the Income Tax Act, 1961 states that it is not within the law for a taxpayer/assessee to challenge the taxing authorities for the correctness of a final and conclusive assessment in the case of an advance tax, barring the taxpayer from seeking review of the same[8]. Section 242 can lead to an immense amount of misconduct on part of the taxing authorities while offering no alternative for the taxpayer for any category of relief from a wrongful assessment[9]. Moreover, taxing authorities have been known to use such provisions for the issuance of demand notices against honest tax abiding citizens, furthering their agenda for the exploitation of the country’s tax administration[10]. Rules such as the Specific Anti-Avoidance Regulations and the General Anti-Avoidance Regulations are further examples of current laws in place wherein through the misuse of provisions, the taxing authorities are capable of issuing demand notices and compliance notices to people who have continued to be honest taxpaying individuals[11]. This practice continues in part under Sections 143, 153 and 210 of the Income Tax Act, 1961 wherein the Central Board of Direct Taxes can issue demand notices against honest taxpaying individuals based on disputes over calculations and suspected under-reporting of income between the taxpayer and the scrutiny officer[12].

The Vodafone case[13] is an exemplary example of the issue of tax terrorism. Along with targeting honest individual Indian taxpayers, the current laws in place and the taxing authorities continue the misuse of these provisions to create impediments for multinational corporations while significantly reducing foreign investor confidence in the Indian markets[14]. In 2007, Vodafone, the largest telecommunications provider in Europe, acquired a stake within a joint venture, via a subsidiary, with one of the largest Indian conglomerates, the Essar Group in order to begin telecommunication services in the country[15]. After the start of its operations in India, Vodafone was charged with taxes amounting to over Rs 250 crores by the Indian government for the acquisition of an Indian company’s assets and thus, the operating of its telecommunications business in India[16]. Denying the taxes, Vodafone refuted the Indian government by claiming that such taxes were not applicable in the context of the company due to the acquisitions of the assets of the joint venture company taking place in the Cayman Islands and therefore not in Indian jurisdiction[17]. Argued before the Supreme Court, Vodafone successfully defended their rationale and claim over the Indian government and denied all charges of evading taxes in India with the Supreme Court pronouncing the judgement in the favour of the company[18].

The recent case of the death of Café Coffee Day’s founder, VG Siddhartha has yet again showcased the problems that persist within the Indian tax administration and tax terrorism. After having committed suicide and leaving business leaders and authorities around the country completely clueless as to the cause, it was later discovered that severe harassment by the tax authorities and a targeted attack on the coffee chain’s business led Siddhartha to the decision to take his own life[19]. A targeted attack, the Directorate General of Income Tax Investigation by way of attaching the shares of the company on multiple occasions and further blocking the company’s deal with Mindtree despite the company’s efforts to file revised returns to the authorities showcase that the claim of “ease of doing business” is a farse and is completely false[20]. Moreover, claims by the income tax authorities of their behaviour being consistent with the provisions of the Income Tax Act, 1961 further showcase the persistent issues that remain in the realm of tax administration in India[21].

Conforming with the declaration to end tax terrorism in the party’s manifesto in 2014, the BJP government has implemented policies to curb the issue. A significant upheaval of the current method of tax administration, the faceless assessment scheme allows the taxpayer to file their taxes through a method of faceless tax scrutiny which essentially abolishes the need for a taxpayer to face the income tax authorities through a direct interface for the scrutiny of their returns[22]. Through the use of artificial intelligence and data analytics, the new faceless system bypasses the need for any form of physical interaction between the taxpayer and the assessing officer[23]. Additionally, the scheme established the National e-Assessment Centre and Regional e-Assessment Centres which allow for the complete abolishment of territorial jurisdiction. The allotment of an individual taxpayer’s case, through allotment to an assessment unit under the NeAC and ReAC, will be completely anonymous and further units such as the Verification Unit will scrutinize the case allowing for complete faceless assessment[24]. Moreover, appeals under this scheme allow the taxpayer to remain completely anonymous while the identity of the officer also remains unknown ensuring the review of the application to be completely faceless and without bias[25].

Despite various efforts by the government to curb the rise of tax terrorism, the problem persists for various reasons. Numerous provisions of the Income Tax Act, 1961are inertly disadvantageous for the honest taxpaying citizen as the laws empower taxing authorities to target and issue demand notices to such individuals despite having had paid all their dues for the financial year[26]. This occurs due to the significant complexity which comes with the legal provisions wherein confusion and disadvantages for the common man leads to the exploitation by the taxing authorities. Moreover, the government’s tax and fiscal targets essentially lead to this exploitation by taxing authorities due to the pressure to fulfil the requirements[27]. The effort to enlarge the collection of taxes leads to the exploitation of provisions to target the honest taxpayer through harassment, seeking more tax than is required to be paid[28]. Crackdown on multinational corporations taking advantage of Special Economic Zones and indulging in activities such as the round tripping of black money has led to the introduction of Minimum Alternative Tax[29]. Such efforts by the government have further destabilized the ease of doing business in India and have significantly reduced investor confidence as well as consumer confidence in the Indian markets[30]. Furthermore, such tactics have led to further non-compliance with the tax regime, encouraging multinational corporations to seek further loopholes in the system for tax evasion while discouraging common consumers to pay tax in a country with an already with an incredibly small number of taxpayers[31].

As can be seen from the Vodafone case, subsequent to the judgment of the Supreme Court, the government’s decision to amend the Income Tax Act, 1961 retrospectively further deteriorates investor confidence in India[32]. Despite the Supreme Court judgement, due to the now retrospective nature of the act, the government was able to impose further taxes on Vodafone as penalties to the tune of more than twenty-thousand crores[33]. Criticism by the BJP on the decision of the UPA government’s decision to conduct the taxing authority in such a manner is hypocritical in nature. As can be seen from the policies of the BJP government, the ease of doing business in India, as well as investor and consumer confidence in the market, has significantly decreased[34].

Additionally, the efforts of the BJP government through schemes such as the faceless assessment are quintessentially flawed in nature. The most significant issue which may arise due to the lack of a face to face assessment of tax filings is the complex nature of the assessment and scrutiny through various departments and units[35]. As mentioned earlier, the faceless assessment procedure undergoes scrutiny under various departments such as the assessment unit and the verification unit etc. whereby due to the demands of each of the departments, a huge responsibility falls on the taxpayer to fulfil those requirements within a short period, therefore, any issues surrounding those requirements and the lack of a face to face interaction can in turn increase conflicts between the taxing authorities and the taxpayers and increase litigation surrounding the matter[36]. Similar issues may arise in the context of corporate taxation wherein due to the complex nature of corporate tax filing involving a magnanimous load of paperwork, the lack of a face to face interaction can, in turn, increase the number of conflicts arising out of this form of assessment and therefore increasing litigation surrounding the matter[37].

As can be seen from the information above, the rise of tax terrorism and the lack of an institutionalized response can in turn increase the persisting issue and give rise to further conflicts in the future. Despite efforts of the current government by means such as the introduction of the faceless assessment has had no effect on the issue which remains and has in turn given rise to decreasing consumer and investor confidence in the Indian markets[38]. The progression of the issue continues through the introduction of schemes such as faceless[39]. Instead, the need of the hour is a direct institutionalized response to the issue at hand by the creation of an anti-tax terrorism board for further relief to both multinational corporates but most importantly to the Indian honest taxpayer. The current state of Indian tax administration requires the implementation of transparent tax laws and the need to clean the taxing authority of corruption to boost consumer morale and to gain the confidence of the people of the country once again.

[1] Arindam Das-Gupta, Shanto Ghost & Dilip Mookherjee, Tax Administration Reform and Taxpayer Compliance in India, 11.5 International Tax and Public Finance 575, 575-600 (2004). [2] Rajat Deb, Limning India’s Tax Terrorism Saga, 18 Vilakshan-XIMB Journal of Management 202, 202-215 (2021). [3] Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors., (2012) 6 S.C.C. 613 (India). [4] Lalit Mohan Jindal, Unmasking Tax Terrorism, Times of India Blog (Jun. 16, 2020), https://timesofindia.indiatimes.com/blogs/voices/unmasking-tax-terrorism/. [5] Seema Pandit, GST: Opportunities and Challenges for Indian MSMEs, 3.3 Inspira-Journal of Commerce, Economics & Computer Science 208, 208-214 (2017). [6] Rajat Deb, Limning India’s Tax Terrorism Saga, 18 Vilakshan-XIMB Journal of Management 202, 202-215 (2021). [7] Id. [8] The Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India) - Section 242. [9] Rajat Deb, Limning India’s Tax Terrorism Saga, 18 Vilakshan-XIMB Journal of Management 202, 202-215 (2021). [10] Id. [11] Debasis Bhattacharya, Democracy and Public Policy in the Post-COVID-19 World: Choices and Outcomes 59-90 (1st ed. 2020). [12] Aarati Krishnan, All You Wanted to Know About: Tax Terrorism, The Hindu BusinessLine (Nov. 25, 2017), https://www.thehindubusinessline.com/opinion/columns/All-you-wanted-to-know-about-Tax-terrorism/article20885792.ece#. [13] Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors., (2012) 6 S.C.C. 613 (India). [14] Aarati Krishnan, All You Wanted to Know About: Tax Terrorism, The Hindu BusinessLine (Nov. 25, 2017), https://www.thehindubusinessline.com/opinion/columns/All-you-wanted-to-know-about-Tax-terrorism/article20885792.ece#. [15] Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors., (2012) 6 S.C.C. 613 (India). [16] Id. [17] Id. [18] Id. [19] Abhijit Kumar Dutta, Policy: Put an End to Tax Terrorism, Moneycontrol (May 11, 2020), https://www.moneycontrol.com/news/economy/policy/policy-put-an-end-to-tax-terrorism-4351761.html. [20] Id. [21] Id. [22] Pradhumna Malpani & Damodar M. Hake, Evaluating the Constitutional Validity of E-Assessment, Faceless Hearing and Appeal Scheme in Light of the Principles of Natural Justice, 6 Journal of Positive School Psychology 4445, 4445-4452 (2022). [23] Id. [24] Sahana S., Types of Assessment-Critical Analysis of Faceless Assessment Scheme 2020, 23 Supremo Amicus 202, 202-210 (2021). [25] Id. [26] Lalit Mohan Jindal, Unmasking Tax Terrorism, Times of India Blog (Jun. 16, 2020), https://timesofindia.indiatimes.com/blogs/voices/unmasking-tax-terrorism/. [27] Alexandra Ulmer & Abhirup Roy, Tax Officials Caught Between Modi’s Unrealistic Targets and Warnings Against ‘Tax Terrorism’, The Wire (Nov. 15, 2019), https://thewire.in/economy/cbdt-tax-targets. [28] Id. [29] Id. [30] Ruhee Mittal & Bishwajeet Prakash, Predicting Taxpayers Attitudes Towards of Indian Tax payers towards the E-Return Filling: An Empirical Study of Delhi NCR, India, 18 Asian Journal of Economics, Business and Accounting 38, 38-45 (2020). [31] Id. [32] Rajat Deb, Limning India’s Tax Terrorism Saga, 18 Vilakshan-XIMB Journal of Management 202, 202-215 (2021). [33] Aarati Krishnan, All You Wanted to Know About: Tax Terrorism, The Hindu BusinessLine (Nov. 25, 2017), https://www.thehindubusinessline.com/opinion/columns/All-you-wanted-to-know-about-Tax-terrorism/article20885792.ece#. [34] Ruhee Mittal & Bishwajeet Prakash, Predicting Taxpayers Attitudes Towards of Indian Tax payers towards the E-Return Filling: An Empirical Study of Delhi NCR, India, 18 Asian Journal of Economics, Business and Accounting 38, 38-45 (2020). [35] Rajat Deb, Limning India’s Tax Terrorism Saga, 18 Vilakshan-XIMB Journal of Management 202, 202-215 (2021). [36] Id. [37] Id. [38] Id. [39] Id.