Direct tax Code -In a frenzy of hurry

by Shri D.P. Mittal, Advocate

Introduction

The Direct Code Bill, 2010, was presented in the Lok Sabha on the 30th August, 2010, to replace the existing Income tax, 1961 and Wealth tax Act, 1957 with effect from 1.4.2012. A draft discussion paper was put on the 12th August last year for public comments and revised draft on the….. for further comments and finally the Bill for legislative approval. It has 319 sections and 22 schedules as against 298 sections and 14 schedules under the income tax Act, 1961 and 47 sections and three schedules under the Wealth Tax Act. The law which had been subject to review by Parliament every year and scrutiny of the Supreme Court, High Courts and Tribunal which led its growth and consequently the growth of economy and employment and holding the field for six decades, is proposed to be crucified by a legislation the draft of which is prepared in the North Block with a bureaucratic mindset which is stated to have accommodated public opinion when within a span of three months the public could not possibly have understood rather than comprehend the implications. The opinion is on what is offered and said and not whether there should at all be fresh legislation and if at all should there be one what should be its shape and frame. To a wrong question, answer could not possibly be right. "You can't depend on your judgment when your imagination is out of focus"- Mark Twain.

Economic legislation and every major amendments in Income tax Act preceded by Committee's reports

Every important economic legislation is preceded by reports by experts. We have Raghavn's Report, Eradi Report, Irani Report, etc. For major changes even in Income tax Act, we have Committees and Commissions and their reports (see Hundred Years of Income Tax Department (1886-1985) by Directorate of Inspection, Income tax Department, some which are given below)

Sim Committee, Todhunter Committee and Ayers Committee reports - 1922 Act

During 1922-1939, three committees whose deliberations and recommendations affected the legislative and administrative functioning of the Income tax department were the (i) All India Committee presided by Mr. G. C. Sim, (ii) Taxation Enquiry Committee 1924-25 known as Todhunter Committee and (iii) Income-tax Enquiry Committee known as Ayers Committee. The Sim committee recommended large scale amendments to the Income-tax Act, as it stood then. It virtually laid down the lines on which, in coming years, the growth of Income - tax Department would take place. The Sim Committee report provided the framework for the Indian Income tax, 1922.

Todhunter Committee made recommendations on matters about appeals and Ayers Committee advised for separation for appellate and administrative functions and appointment of independent Tribunal as a result of which Income Tax Appellate Tribunal came into existence in 1941.

Expert Committee - 1939 Amendment Act

In 1935 an Expert Committee on Income tax was constituted for the purposes of revising the Indian Income tax Act of 1922 so as to-

a) remove certain anomalies and difficulties experienced in its working and to make it a comprehensive statute, and

b) to recommend organisational changes so as to make it the Income- tax Department self sufficient/self-contained Department of Central Government, for collection of direct taxes.

The committee went into procedural, technical as well as administrative aspects of Federal Administration and submitted its report on 24th December, 1936. It was deliberated upon by the government for three long years and even then its recommendations were introduced as an amendment bill. There were wide differences of opinion and the bill was referred to the Select Committee of the Legislative Council. It was finally passed as the Amendment Act VII of 1939.

Varadacharier Commission- 1953 amendment Act

The Income tax Investigation Commission headed by Sir S. Varadacharier, ex-judge of the Federal Court was appointed to investigate and report to the Central Government on all matters relating to taxation of income, with particular reference to the extent to which the existing law and procedure was adequate to prevent tax evasion Based on the Committee's report, in December 1948, a comprehensive Income - tax ( Amendment) Act, 1953 was passed.

Taxation Enquiry Commission (1953-54)

Taxation Enquiry commission was appointed in 1953 not only to review the structure of taxes on income but also to carry out as in depth study of the central taxes and their administration. The Commission carried out a comprehensive study and made a number of recommendations of far reaching consequences. The recommendations for reducing the exemption limit, increasing the tax rates and introduction of development rebate were duly implemented.

Prof. Kaldor's Report on Indian tax reforms (1956)

Prof. Nicholas Kaldor views were desired by the Government in 1955 about the structure of Indian taxation in view of the larger dimensions assumed by the problem of resources for the plan. He recommended the broadening of tax base through the introduction of

• an annual tax on wealth ;

• the taxation of capital gains;

• a general gift tax; and

• a personal expenditure tax.

For reducing the scope of tax evasion, he suggested the introduction of the institution of a comprehensive tax return for all direct taxes and the introduction of a comprehensive reporting system on all properties transferred and other transactions of a capital nature. He also recommended breaking of vicious circle of charging more and more on less and less. According to him, rates should lowered so that maximum rate of income tax is 45%.

His recommendations for introduction of new taxes were accepted, and advice for schedule of rates new taxes was revised. His suggestion about comprehensive tax return for all direct taxes was referred to Direct Taxes Administration Enquiry Committee.

Direct Taxes Administration Enquiry Committee (Tyagi Committee) - 1958-59

The direct Taxes Administrative Committee was set up in June 1958 to advise Government on the administration organisation and procedures necessary for implementing the integrated scheme of direct taxation with due regard to the need for implementing tax evasion and avoiding inconvenience to the assesses, chaired by Mahavir Tyagi, M.P. It submitted its report in November, 1959. It did not favour one comprehensive return for all direct taxes and recognised that the simplification of statues was not an easy task. It also made far reaching suggestions regarding administrative machinery, improving training facilities and adopting 'merit and efficiency' as the sole criteria for filling of selection posts in any cadre. Most of the recommendations were accepted through legislation or through administrative measures.

Law Commission's report (1958)

The Government asked the Law Commission in 1956 to revise the Indian Income tax Act, 1922. About the said Act, the commission remarked, " there is hardly any Act on the Indian Statute Book which is so complicated, so illogical in the arrangement, and in some respects so obscure as the Income-tax Act, 1922". The revised draft was prepared by a committee of eminent jurists, consisting of P. Satyanarayan Rao, G. N. Joshi and N.A. Palkhiwala. The commission submitted the draft in September, 1958. It re-arranged and regrouped the various sections of the Act and simplified the language mainly by splitting long sections into independent ones and converting the proviso into independent provisions. Apart from changes in form some changes in the substance were also made. The committee draft was the basis for the enactment of the Income tax Act, 1961.

Boothalingam Committee Report (1967)

Boothalingam committee report on rationalisation and simplification of the tax structure was received in 1967

Administrative Reforms Commission Report (1968)

Administrative Reforms Commission Report recommended the desirability of speeding up assessment work, which brought into existence the procedure which is now referred to as summary assessment scheme.

Direct Taxes Enquiry Committee ( Wanchoo Committee) Report (1969)

Wanchoo Committee Report made certain important recommendations which were to have a far- reaching effect on the growth and functioning of the income-tax department. One suggestion resulted in the establishment of Settlement commission.

Direct Taxes Laws Committee( Choksi Committee) Report (1978)

The Direct Laws Committee was constituted in June 1977 under the chairmanship of N.A. Palkhiwala, an eminent jurist. Which was later headed by G. C. Choksi. The report of the committee was received in 1978. It made some very valuable suggestions

Economic Administrative Reforms Commission (Jha Committee) Report (1983)

In March, 1981, the Government constituted the Economic Administrative Reforms Commission to review and make suggestions about the Income tax law, Procedure and Organisation of the department. The report was published in 1983. Some of them were accepted by the Department.

Direct tax Code- framed by bureaucracy and not on the basis of an Expert opinion

Every major amendment in the Income tax required experts opinion, and therefore government appointed committees or commissions with experts on its panel of the stature of eminent jurist like N.A. Palkhiwala, before it was actually implemented. The replacement of the 1922 Act with the 1961 Act was the result of input by Kaldor's(1956), Tyagi's (1958) and Law Commission reports (1958) and debates, discussions, seminars for three long years on the draft prepared by a committee of eminent jurists, consisting of P. Satyanarayan Rao, G. N. Joshi and N.A. Palkhiwala submitted in September, 1958. In the present case, the necessity of such committees, debates, discussions, etc. was not considered necessary, as if to suggest that the draft prepared for the Direct Tax Code, 2010, is as good as or perhaps better than that prepared for the 1961 Act by a committee of eminent jurist and that it so complete it does not require and cannot tolerate three years debate and discussion. The government appears to be in great hurry to get it passed as an Act within a span of one year, with the formality of putting it, public opinion but no debate and discussions and that too for a period of three months and another two months, with no option as to whether a revised code is at all necessary and if necessary to have a framework different from what the government had proposed. It appears very oblivious to the following warning given by the Law Commission (Report 1958):

" In legislation as in other fields of human activity, it is well in mind the dictum of Bacon, Tarry a little, so that we may make an end the sooner'. Stability is most essential to the proper administration of a taxing statute, and if the tax structure of this country is to put on sound footing, it is essential that halt should be called to making the ill digested amendments in a frenzy of hurry, which has characterised the history of income- tax law of the last few years.”

III digested Code in a frenzy of hurry

"III digested Code in a frenzy of hurry" appropriately describes the Direct Tax Code, 2010.

An hurried act is always not a right act. The Hindu old scripture says that an angry man, a hungry man, a man in love, a man in haste will never do a right thing [A. L. Bhash'am]. This appropriately applies to the present code. This is evident from the reaction of the government to the objections and suggestions of vested interest on the various provisions, for example, MAT, EET, housing loan, other incentives, that it promptly either dropped or modified those provisions. It is not clear whether the earlier proposals or the subsequent modification or deletions were correct. The readiness and promptness of succumbing to suggestions by the public which again may not be correct, would indicate the political expediency and not the economic consideration is the cornerstone of the code. It could appropriately be described "III digested Code in a frenzy of hurry". It is doubtful whether the suggestions have economic or social consideration or whether such considerations outweigh the larger interests of economic growth. These were the suggestions by the vested interests; each interest in a particular provision confined that provision and does reflect comment to the Code as a whole.

DTC Bill based on bureaucratic opinion on Humpty Dumpty way

Individual opinion cannot be a substitute for the experts' opinion; first, because he does not have the expertise to understand the implication of the Act as a whole, and secondly, it is blinded by self interest. His opinion is like the opinion of a blind man describing an elephant. One may describe it as a wall, the other as pillar, or fan or a rope depending upon what he is against; but none describing it as a living organism. The expert with profound responsibility could ill- afford to take a stolid satisfaction of a single provision. He has to see all provisions as a whole as Cicero said about some one, "He saw life clearly and he saw it whole".

The DTC Bill based on the bureaucratic opinion is faulty for the same reasons. The Act based on such opinion would be blunted when applied to practical problems, for the reasons that the opinion holder thinks what he holds is the best for the economy and is also the opinion of the public. He is convinced that his opinion is correct, without realising that it may be incorrect. He wants the public to accept it as Humpty Dumpty (Lewis Carroll in Through the Looking - Glass) said to a query by Alice, "When I use a word, it means what I choose it to mean rather more nor less. The question is which is to be master-that's all". When Humpty Dumpty does that, he is riding for a fall and he does fall and is broken in pieces. The best way would have been that instead of relying upon his own opinion in the belief that it represents the best interest of the economy and the public and consequently heading to a fall, he would have sought the opinion of an experts committee as was done when the 1922 Act was replaced by the 1961 Act by appointing a committee of eminent jurists, consisting of P. Satyanarayan Rao, G. N. Joshi and N.A. Palkhiwala.

source: Taxmann.com