While debating on the Finance Bill, 2017, in the Rajya Sabha, Congress leader Jairam Ramesh, referring to the changes made in Section 132 of the Income-tax Act, said that particular section was tax terrorism multiplied by ten.
"If Vodafone was tax terrorism, Section 132 is tax jihad because what you have done is, you have removed reason to believe, you have removed reason to suspect, and given untrammelled powers to a tax bureaucracy and a tax administration whose credibility is suspect in the eyes of the public," he quipped.
Ramesh's view on (the changes made in) Section 132, which deals with search and seizure operations, has been seconded by many, although not as emphatically. The reason behind the low-key reaction could be the sweeping power that the changes in the section give to tax authorities. Earlier, reasons for search and seizure by the tax department had to be disclosed to taxpayers. But now the Finance Bill bars tax authorities from disclosing the reason to taxpayers or the appellate tribunal. A person subjected to a tax raid, can only know the reason by filing a writ petition in the High Court.
Responding to queries on this issue in the Rajya Sabha, Finance Minister Arun Jaitley said that the change was necessary to protect the 'source' of the information. Clearly, members of the Upper House were not convinced and they moved an amendment, which was also adopted, only to be junked when the Lok Sabha passed the Bill.
Tax and legal experts, who have always complained about the extortionist ways of the tax authorities, are clearly not impressed by this move of the government, especially as tax terrorism was one of the pre-poll agendas of the ruling Bharatiya Janata Party (BJP). But not many will openly criticise the government.
However, Anand Prasad, one of the co-founders of the law firm Trilegal, questioned the government's commitment to tax reforms. "These powers in the hands of honest tax authorities are okay, but the fact is that tax authorities in India are corrupt and extortionists, and the government has not done much to change this," he says.
Section 132 was one of the many contentious issues in the Finance Bill. The Opposition and some experts pointed to the government's high-handedness in the way it incorporated certain non-finance provisions in the Bill, then presented it as a money bill and got it passed by the Lower House, overlooking the Upper House.
One such amendment is the decision to replace some tribunals and appellate tribunals by other existing ones. For instance, the Competition Appellate Tribunal will be replaced and its powers will be given to the National Company Law Appellate Tribunal (NCLAT). Also, the Airports Economic Regulatory Authority Appellate Tribunal and the Cyber Appellate Tribunal are to be replaced by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).
The government's contention is that the number of tribunals has gone up and that needs to be rationalised. However, experts believe that given the 'specialised' nature of these tribunals, it is not clear whether the tribunals replacing them will have the expertise to carry out the work their predecessors were meant to do.
"The rationale behind replacing certain tribunals is unclear. For example, the TDSAT may not have the expertise to adjudicate matters related to the pricing of airport services. Similarly, it is unclear if the NCLAT, which deals with matters related to company disputes and governance, will have the expertise to deal with matters related to anti-competitive practices," a PRS India analysis says.
What matters more is that the power to appoint members of these tribunals now lies with the government. Earlier, terms of service of chairpersons and other members of tribunals, appellate tribunals and other authorities were specified in their respective Acts. This, according to PRS India, can affect the independent functioning of the tribunals.
Black Money Overkill?
While the amendment in Section 132 is an apparent attempt to empower tax authorities against tax evaders to strengthen the government's bigger fight against black money, the decision to lower the threshold for cash transaction from `3 lakh to `2 lakh is another attempt to further this cause.
It was unexpected, though, as there were huge protests against the original provision of `3 lakh. But those seemed to have cut no ice with the government. As of now, any cash payment in excess of `2 lakh will attract 100 per cent penalty, to be paid by the receiver.
According to Sunil Kapadia, tax partner at EY, there may be many practical situations where people may want to receive cash payments worth more than `2 lakh. "For example, you have a credit card bill of more than `2 lakh and you missed the payment due date. Many a time, the card company will pressurise you to make the payment immediately and is ready to take the payment in cash," he elaborates. "Also, on several occasions, people want to pay consumer loans and personal loans in cash. But as per the new provision, if a non-banking financial company (NBFC) or a card company receives cash payment, it will have to pay tax. That is going to have a negative impact on these companies."
In another apparent move to control tax evasion and black money generation, the Bill has a provision that says all PAN numbers should be linked to Aadhaar numbers by July 1, 2017, failing which it may lead to invalidation of the PAN. That it may lead to a number of practical problems is not something the government has taken into account.
"Today all IT department records and everything else -- refunds, rectification and so on -- are based on your PAN. If it becomes invalid after July 1, you are going to face a major problem because you must have a new PAN and you dont know how to link transactions and records based on old PAN with the new one," Kapadia of EY explains.
There is another 'controversial' provision that reeks of retrospective taxation. At present, long-term capital gains from sale of listed equities are exempt from tax under Section 10 (38). But the section has been amended to restrict the exemption only on gains made from sale of equities where the securities transaction tax (STT) has been paid.
What it essentially means is that capital gains made on listed equity shares purchased after April 1, 2004 (when the STT came into force), will now be taxed if the STT is not paid on such share purchases. There are many situations where a transaction of listed shares does not attract STT, including shares purchased through initial public offerings (IPOs), follow-on public offers (FPOs), employee stock ownership plans (ESOPs), bonuses and splits. But the government is yet come out with the list of transactions exempted from such tax.
"There was expectation that the Bill would be amended and only prospective share transactions would be subjected to such tax. We were hoping the government would come out with a list of exemptions, but nothing has happened so far," says Abhishek Goenka, tax partner, PwC.
This is one issue on which opinions are sharply divided. While one section has welcomed the move, an equally big section has condemned the government for betraying the call of 'transparency' in poll funding.
At present, a company can donate up to 7.5 per cent of the average three-year net profit to political parties. Besides, it is also supposed to disclose the name of the party and the amount donated. Now the earlier cap on corporate donation has been removed and it is no longer compulsory for companies to declare political donations.
Some consider it a pragmatic move as it protects companies from political 'witch-hunt' while others call it a move that will open the floodgates for political corruption.
Overall, the Finance Bill that has been passed is not only about the number of amendments, but also about the kind of amendments and the way it has been passed. In spite of the controversies, the government has managed to sneak in some 'harsh' provisions in the Finance Bill. Only time can tell if the measures are well thought out or just a show of political one-upmanship.