Harmonious Relationship between Tax Advisors and Tax Administrators for effective implementation of taxation law : Praveen H. Parekh, Advocate, President, Supreme Court Bar Association of India

It was only for the good of his subjects that he collected taxes from them, just as sun draws moisture from the earth to give it back a thousand fold”.

— Kalidas in Raghuvansh eulogizing
KING DALIP

“The hardest thing in the world to understand is the income-tax”.

Not my words, but words spoken by the man, who by common consensus is regarded as the most intelligent human being ever, Albert Einstein.

So what is it about tax laws that make ordinary mortals break into a sweat? As a famous man once said, “People who complain about taxes can be divided into two classes : men and women.” Is it the complex laws, the stringent penalties or the requirement to pay attention to the minutest of details? Each and every facet of our life is now regulated by the State and is liable to tax.

Taxation in India has been in force in one form or another from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and lawmaker stated that the king could levy taxes according to Sastras. However he cautioned the King against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation.

Post independence, there was a time when the rate of income tax used to be more than 90 per cent. With the disallowances and capital expenditure, one had to pay more tax than the income. Add to that when highly unreasonable laws about prosecution and penalty and to that you add the other direct taxes. The assumption of Parliament while making such laws was that no taxpayer was honest. The tax advisors were justified in advising tax planning bordering tax evasion. At that time the tension between the Tax Advisors and the Tax Administrators was very high. The difference between tax evasion and tax avoidance was highlighted by both. Some judgments of the Supreme Court permitted the assessee to arrange his affairs so as to attract minimum tax whereas some judgment of the Supreme Court treated tax planning as tax evasion.

Late Mr. N.A. Palkhivala, the great legal luminary of the country once said , “Taxes are the life blood of any government but it cannot be over emphasized that the blood is taken from arteries of tax-payers and therefore, the transfusion has to be accomplished in accordance with the principles of justice and fair play”.

Philosophy and the attitude of the Government the Finance Minister and the department have now undergone a sea change — a change for better. The tax rates have come down. The attitude of the Department has softened. They have started accepting the returns. Except which are taken up for scrutiny.

With this change in the taxation laws and the change in philosophy of the tax gatherer, it is necessary that the Tax advisors advise the tax payers to honestly pay what is payable and not to dodge the payment. The Tax Advisors should not now resort to old type of ridiculous tax planning.

The harmonious relations between tax advisors and tax administrators are absolutely necessary. In the absence of harmonious relationship, the Tax Advisors would not be able to give their best in fairness and admitting the reality of the situation. The Tax Administrators will also be able to give their best only if they get the necessary co-operation.

There is no other instance in Indian jurisprudence of an Act (Income-tax Act, 1961) mutilated by more than 3300 amendments in less than thirty years. This has continued even after 1991 but for the good.

The amendments to the taxing laws are essential in developing economies to make them competitive and attractive to foreign investors and to ensure higher tax compliance within the country. As a result, taxing laws are amended each year. With each amendment, the task of Tax Administrator and Tax Advisor becomes difficult as the onus of interpreting the taxing law lies on the Tax Administrators for the Government and the Tax Advisor for his clients. The harmonious relationship between the Tax Administrator and Tax Adviser becomes essential.
Parliament can ease tension by enacting reasonable laws. Likewise Tax administrators can ease tension by implementing tax-laws reasonably and properly. They both should ensure that “Law is an ass” does not hold good. Here harmonious relationship can play a crucial role.

While Tax Advisors play an essential role in maintaining the integrity and efficiency of the tax system, providing a key compliance leverage point to influence tax-payer’s behavior. Tax Administrators play an important role in interpretation and implementation of taxing statues.

Tax advisers generally do an excellent job in helping people understand their rights and obligations under the tax law and making it easier for people to meet their tax responsibilities. Tax Administrators carry the burden of ensuring that the tax-payer is not to be taxed without clear words for that purpose. If the person sought to be taxed comes within the letter of law then he must be taxed. In construing fiscal statute and determining a liability one has to rely on strict provisions of the law. There is no room for equity or presumption as to the tax.

Most of the time the tax-payer relies on the advice received from the Tax Advisors. My senior, Mr. H.R. Gokhale was appearing in a Criminal Special Leave Petition in the Supreme Court where the defence of the assessee was that he had merely signed the blank return and handed over to his Tax Advisors and neither he understood the complexity nor did he ask his Tax Advisors to avoid paying what was legitimately due. When the Judges said that they would not believe that a man would sign the income tax return in blank, Mr. Gokhale told the judges that at least he himself used to sign the income tax returns without reading it.

Who is a Tax Adviser? A Tax Adviser is an expert especially trained in tax law. Professional assistance with tax matters is required except in the most straightforward situations because of the complexity of the tax system. Individuals usually require tax advisors to minimize taxation, to avoid learning the details of tax law in complicated financial situations themselves or to learn the details of tax law from a professional advisor. The quality of their advice, their professionalism and ethics play a central role in the tax system. As Tax advisers generally give the necessary advice on what is the tax law, how to interpret it, how to get the maximum benefits of provisions and also assist tax-payers in preparing tax returns and advise and represent tax-payers in their communications with the Tax Administrators they are, in effect, intermediaries between the tax-payers and the department. The assistance provided by professional Tax Advisers is aimed at providing better quality of the tax return and tax compliance generally.

The functions of a Tax Advisor, broadly speaking are :

1. Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered.

2. Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law.

3. Advising the client regarding the import of the conclusions reached, including, for example, whether a tax-payer may avoid accuracy-related penalties if a tax-payer acts on the advice.

4. Acting fairly and with integrity in practice before the tax department.
   
   While referring to Tax Administrators, I refer to the much feared and greatly misunderstood –Tax men. The aim of taxation by any authority is the realization of maximum resources for the nation. The functions of the taxation department can be broadly defined as follows:-

1. To promote compliance with tax laws.

2. Tax-payer service.

3. Implement tax laws reasonably.

These functions comprise the following separable component activities:

• Taxpayers’ education and service.

• Collection of information

• Dissemination of information

• Storage and retrieval of information.

• Verification (appraisal/assessment of information)

• Collection of taxes.

• Tax-payers’ grievances redressal system.

Enforcement of tax laws has become more difficult as trade and capital liberalization and advances in communications technologies have opened the global marketplace to a wider spectrum of tax-payers. With this more open economic environment is good for business and global growth it can lead to structures which challenge tax rules, and schemes and arrangements by both domestic and foreign tax-payers to facilitate non-compliance with our national tax laws. This raises continued concerns about corporate governance and the role of tax advisors and financial and other institutions in relation to non-compliance and the promotion of unacceptable tax minimization arrangements. Every person has the duty of interpreting the law, to try to find the true meaning of the statutory provision and not to adopt a strained construction in the belief that he or she is “protecting the revenue”. The revenue is properly protected only when the true and reasonable meaning of the statute is ascertained and applied.

The assistance provided by professional tax advisers ought to result in better quality of the tax return and tax compliance generally. Tax Advisers are duly bound to advise their clients on how to pay no more than the law requires. But their behaviour causes concern if they advise their behavior causes concern if they advise their clients to engage in transactions that purport to be effective to avoid tax, but in fact are not. It is also a matter of concern if they advise their clients to engage in tax evasion, or otherwise not to comply with their obligations, or if they hinder, delay or obstruct tax investigations. At times there is too much of tax planning or taking better of the law to absurd results.

While professional Tax Advisors have increased compliance with unambiguous law, they have decreased compliance with ambiguous law. In these cases, the proper assessment of their client depends on detection by the Department. It is here that the relationship of the Tax Advisors and Tax Administrators becomes very important.

Advance ruling is another instance of harmonious relationship between the Tax Administrator and Tax Advisor. Whenever there is any ambiguity as to the correct interpretation of any taxing statute, it is duty of the Tax Advistor to encourage his client to seek advance ruling from the Taxing Authority, to ensure due compliance with the law. This is mutually beneficial to both the Taxing Authority and Tax Adviser; this would set the precedence for the future.

A responsible tax administration must be effective and efficient in its task. Effective tax administration requires establishing an environment, in which citizens are induced to comply with tax laws voluntarily. People would comply with the tax laws so long as they feel that non-compliance may cost more, that is, that the penalties likely to be suffered in case evasion is detected exceed the tax to be paid. Compliance is unlikely to be high if the belief prevails that evasion can be practised with impunity. The free-rider instinct is universal and an element of coercion seems inherent. How effectively the tax administration can foster compliance would depend ultimately upon their perceived ability to detect and bring tax offenders to book, namely, unregistered tax-payers, stopfilers, tax evaders and delinquent tax-payers. The tax administration must deal with all these categories of tax-payers simultaneously; otherwise non-compliance will shift to the gap where the administration exercises weaker control. Efficient tax administration requires that its task be performed at minimum cost to the community.
The number of tax-payers has increased as high as 2.6 crore during the year 2001-02 as against 0.25 crore, during 1970-71 these are further estimated to increase at 3.5 Crore in the year 2006-07. The number of tax-payer and direct tax revenue are highly co-related. The direct tax revenue to GDP in India has increased significantly to 4.2% in 2004-05 as against 1.9% in 1990-91. The provisional figure for the year 2005-06 is 4.5% and the budgetary estimate for the year 2006-07 is at whopping 5.1%. This has made it more necessary for a better understanding between the Tax Advisors and Tax Administrators. The following suggestions will be useful in maintaining harmonious relationship.

1. Maintain a climate of trust between the tax administration and the tax advisors, thus avoiding arrogant or antagonistic behaviour on either side. Treat each other as being fair and trustworthy.

2. Focus on interests rather than taking positions.

3. Aim at an open and unbiased dialogue.

4. The tax administration should not refer tax-payers or their advisors to judicial proceedings as long an efficient, reasonable and timely solution can still be reached.

5. Tax advisors should not threaten to unduly delay the assessment procedure by taking legal action.

6. The tax advisor must be able to say “no” to his client in any dubious/questionable practices of the client.

7. “Protect the client against himself”; i.e., avoid unreasonable requests and frivolous practices that will end by harming the client, the tax advisor, or both.

8. Equal treatment: equals should be treated equally, and unequals should be treated unequally; tax-payers’ cases will be treated differently only if the distinctive factual or legal features can be proved.

9. Ensure full transparency of administrative practices.

10. Systematic publication of administrative practices by the Department and sending it to tax advisors or their associates.

11. Timely announcements and publication of changes affecting administrative practices.

12. Unreported court decisions must be brought to the attention of tax administrators and tax advisors.

13. Transparency.

14. Disclosure of interests and any potential conflicts of interest.

The following reform measures in Tax Administration will be mutually beneficial:

Conclusion

A harmonious relationship between the tax Advisors and Tax Administrators is most essential for the effective implementation of taxation laws. A properly synchronized system will benefit the authorities and the people alike. Tax evasion will come down considerably and the idea of reasonable tax planning will get the much-needed boost. The self-assessment process is becoming very popular and it is very conducive to making the system simpler and tax-payer friendly.

The tax advisors and the tax administration ought to work together in sincere and proper manner in the interest of the revenue and the tax-payer. This should be achieved by better understanding and co-operation.