Tax statutes are enacted by Parliament. The finance minister provides the intent and purpose of tax statutes in his budget speech. The explanation for the proposals is given in the Finance Bill. Statutes are drafted keeping in mind the intent and purpose of enacting them.
The tax statutes should be drafted with precision and clarity so that they can express and serve the intent and purpose of the legislature, lest they are subject to misinterpretation.
Interpretation is the art of finding out the true sense of the enactment or statute. In most cases, this principle is never followed. Taxpayers try to interpret the tax statutes to minimise their tax liabilities. In contrast, tax officers try to interpret the statutes to generate maximum revenue by denying the tax benefits available to taxpayers. The objectives of taxpayers and tax officers are at odds with each other. This has resulted in an increasing number of disputes and litigations. In most cases, the interpretation of tax laws is arbitrary and does not discourage further violations. It is a well-settled principle that tax statutes should be interpreted in favour of the taxpayer. When two opinions are possible, the opinion beneficial to taxpayers should prevail. However, usually, the opposite happens. One of the reasons for this misinterpretation is that the tax statutes are not drafted with clarity. Even the intent of the legislature is not considered by the tax officer while passing the orders. Tax statutes should be drafted in an objective manner to leave no room for misinterpretation.
At present, because of stringent provisions of interest, penalty and prosecution, taxpayers try to find the precise meaning of the tax provisions to derive every available tax benefit. The stringent provisions of tax laws make taxpayers avoid misinterpretation of tax statutes. An incorrect decision may cost them large amounts in interest and penalty in addition to their tax liability. They may also be subject to prosecution.
The tax authorities must interpret tax statutes more wisely. The provisions of tax statutes must be construed to advance its objectives, not to frustrate them. Every taxpayer is entitled to arrange his/her affairs based on the existing law and should not find that his plan has been upset by a different interpretation of the law. When a statute invests a tax officer with authority to act in a specific set of circumstances, it is imperative upon him/her to exercise his authority in a manner appropriate to the case. The power is not discretionary and the officer cannot decline to exercise it. Nor does the tax officer have the power to act beyond the terms under which benefits have been granted to taxpayers.
However, this is not what tax authorities do in practice. One reason is that the officers are not subject to any penalty if they misinterpret tax statutes. They are protected and not penalised for any incorrect additions they make while assessing incomes and liabilities. The same set of rules of interpretation is not applicable to tax officers as applicable to taxpayers. There is no accountability. They don’t even bother to consider the intent of the legislature. In fact, it is common practice to read between the lines and to interpret tax statutes to derive maximum revenue. In some cases, even the orders of tribunals and high courts are not respected, even though tax officials are legally bound to accept the precedent set by the judiciary. Remedial action, through an appeal, is available against the order but not against the tax officer who passes the wrong order.
Section 80HHC provides the best examples of the misinterpretation of tax provisions. It has resulted in lakhs of cases of tax disputes and litigations. Unnecessary tax demands were raised. Every taxpayer claiming a deduction under section 80HHC was put to undue hardship and prolonged litigation. First, there were disputes about the method of calculating the deduction. The second kind of disputes were over whether excise duty is a part of the total turnover to calculate the deduction. Third, whether deductions under section 80HHC are available on the proceeds from the Duty Entitled Pass Book (DEPB) incentive. Most of the disputes were settled in favour of the taxpayers. They resulted only in wasting the time of the tax department, judiciary and taxpayers. This could have been avoided if provisions under section 80HHC had been drafted with clarity, leaving no room for misinterpretation.
Since the Income Tax Act, 1961, was enacted, it has a had history of many such cases of disputes and litigations, causing undue hardship to taxpayers for years. To avoid this, there should be set of rules to implement tax statutes. The tax statutes shall be drafted with clarity to serve the intent and purpose of the legislature.
Our tax regime should be a friendly one. Issuing certificates of appreciation to all taxpayers for their contribution is not a remedy. The true principles of interpretation should be followed to avoid the excesses of tax officers. Taxpayers should be protected from corrupt officials.