The Indian Income Tax Act of 1961 has 298 sections. Some remain sections solely because of legal reasons; for all practical purposes they are useless. Others have letters—A, B, C and so on—plugged in, making them sound like ballistic missiles. The precise number of sections and schedules isn’t important. What is important is that there are too many. Some sections are as long as eight printed pages. And the language is such that law is incomprehensible to taxpayers. In fact, it is often incomprehensible to experts too, which is why there is litigation, more often than not an outcome of bad drafting.
Barring the preliminary sections, there is almost no part of the IT Act that hasn’t been questioned through litigation and differing interpretation. Litigation can mean an average of 20 years, including appeals, which means that you can spend up to 20% of your life (if not more) litigating. It’s small consolation that before the reforms, the IT Act used to have 600 sections.
Trade policy is a good instance of what should happen. The more reforms occurred, the thinner the export-import policy became and lesser was the need for an expert to interpret it. We need an IT Act that is no longer than 20 pages, comprehensible to citizens without chartered accountants, lawyers and courts.
For a start, this requires stability and transparency and an end to discretion. Why should the Finance Bill require changes in the IT Act every year? The Act and rates should be stable and fixed in the medium term. The bane is discretion and exemptions. If we are candid, we should admit that we too want exemptions for ourselves. Why should there be an acceptable deduction for education expenditure? If education, why not health? Why should small savings receive special treatment? What is the logical difference between savings in government securities and savings in equity?
First, there is no empirical evidence that incentives encourage investment, savings, education expenditure, or whatever we wish to stimulate. Second, once we allow exemptions and special treatment, there is no end. Everything seems desirable (for proof of this, witness the lobbying in North Block before every Budget). There are other means to attain these than through the tax policy.
Third, as long as exemptions remain, compliance costs will be high, as will litigation and discretion. Fourth, government tax revenue suffers, and a large percentage of revenue is spent on collection costs. Fifth, the administrative system wishes exemptions to continue, because that’s an avenue for corruption.
Unfortunately, we don’t think things through. We exempted Sikkim from income tax. Today, PAN cards are an accepted form of identification but there is no way we can give the citizens of Sikkim PAN cards. The Chinese may have a point.
I am not sure finance ministers like the end of discretion. Discretion gives them power. Without discretion, there will be no Budget speech. And since we also like discretion, the country will only chip away at the IT Act, not overhaul it.
Bibek Debroy is economist and expert in economic legislation.
