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Indian Acts, amendments and russian roulette!


 Whenever any change in the IT Act is contemplated it should be put through only one filter which is "simplification" of the tax. Revenue considerations, whether an increase or decrease, not to enter as a filter for any piecemeal or Adhoc changes during the course of the year.  Simplification, reduction of tax, widening of tax base may be used as multiple filters for once a year changes in the Budget. Many times an amendment is done in the name of maximizing tax revenues and plugging loopholes. This is a pure travesty of truth. Instead, Govt should move towards simplification and ease of compliance. This obsession with revenue maximization is a colonial hangover.

Very often IRS officers and CBDT also complain about CAG Damocles sword over their heads if they don't plug loopholes. Indirectly such a plethora of amendments and tinkering goads loophole industry to become more innovative.CAs, lawyers enjoy and thrive on this.More the loopholes and more the plugging.More they change,more they remain the same!!!

Probably many are trying to say if simplified ,more taxes thro voluntary compliance can be collected. They also suggest a remedy like new simple Direct Tax Code ( DTC),which is good but may throw more complications ,uncertainty ,unintended consequences into the moribund system if this new tax code is introduced all of a sudden (like that of GST).So at least in the short to medium term, Central govt should work towards only simplification in terms of return filing, assessments, presumptive tax , reducing litigation etc and keep revenue maximization in the back burner.

 One of the important points in this context needs some elaboration.AOs, CIT Appeals have a tendency to overrule a precedent Court judgment by taking a flimsy, perverted, convoluted argument or a trivial or a vexatious finding to make the court ruling inapplicable,just to maximize revenue collections and reach their targets for the year.Then deliberately they will make mistakes in calculations just to boost unpaid tax amount and threaten the assessees subtly showing it as arrears in demand.These are all euphemistically called "high pitched" assessments.!!

Few funny examples of unintended consequences or "Cobra effect" are given below:

1)Under IndAs, Redeemable Preference shares will have to be grouped under Borrowings and not to be included under Share Capital. This is in line with IFRS ,since Redeemable Pref.Shares with a fixed dividend payments have the substance similar to that of a borrowing even though by name they are called Shares.

However under our Cos. Act, 2013, the Redeemable Pref.Shares are continued to be classified as part of paidup Share capital.

This dichotomy, apart from skewing Debt:Equity ratios create other unintended consequences in the declaration of ShareCapital for the appointment of KMPs etc. and for presentation to the Lending institutions, Credit Rating Agencies etc.

An amendment in Cos. Act to align this with IndAs is long pending and would be a welcome step.

2)Similar is the case with depreciation calculation under Cos. Act and Indian Income Tax Act. Depreciation under IT Act can be charged at a higher rate (accelerated rate) allowable under the Act for claiming higher tax rebate whereas Cos. Act & IndAs prescribe lower rates for presenting the Financial Statements for declaration of dividend etc. Due to this anomaly every year Indian companies will have to work out Deferred Tax liability for deferring the tax by availing higher depreciation. Over the period the profits under Tax and IndAs will be smoothened out. This is pure legislative fiction. By aligning the tax rates under both the legislations this fiction can be easily removed. Is our Govt listening to simplification or trying to complicate things in the name of simplification.!!!

If anybody wagers on Russian roulette, most of the time winning it would depend on your luck and stars, and similar is the case of somebody wading through the muddy waters of Indian Income tax Act.




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