Rights of Taxpayers in India

[Harshul Bangia]

By Harshul Bangia

Introduction

Human rights and taxes today have an obvious and unmistakable connection, with human rights having a tangible and formal impact on many aspects of the tax relationship. A taxpayer's stance on tax claims is more easily recognised because of human rights, which gives them the right to participate and defend themselves in procedures relating to the assessment of their tax obligation. Human rights help to clarify the relationship between the government and the taxpayer.

To combat tax avoidance and evasion, as well as what has been dubbed "aggressive tax planning," the present political environment and government reaction have increased the investigative capabilities of tax administrations. These newfound capabilities must be weighed against the need to safeguard the basic rights of taxpayers at all times. We can now identify the underlying rules and best practises that guarantee the full enjoyment of these rights based on current research (within the scope of human rights). As tax administrations expand their authority, it's critical to keep these principles, norms, and practises up to date and assist in their future development and implementation.

India has been labelled a supporter of "tax terrorism" as a fiscal jurisdiction. Despite many efforts by lawmakers and administrators to bridge the gap between taxpayers and tax collectors, the chasm remains large. The mistrust grows for a variety of reasons, including lack of clarity, the application of charge clauses retroactively, and the impression of an adversarial regime. In light of this, it's critical to look at the extent of Indian taxpayer rights.

The Union Budget 2020-21 proposed the establishment of a Taxpayers Charter. The tax administration strives to provide services efficiently while still being fair and equitable to taxpayers. Ending tax officer harassment and over-inspection is the goal. New section 119A was inserted by the Union Budget 2020 informs taxpayers of a Taxpayers Charter that details taxpayer rights and responsibilities. Consequently, on August 13, 2020, a new Taxpayers Charter became effective.

The new Union budget of 2021 imposes a detrimental effect on the investment environment and the country's image as a whole as a result of the decision to replace two quasi-judicial bodies (the Income-Tax Settlement Commission and the Authority for Advance Ruling) with administrative boards. This has negatively affected the rights of taxpayers. So, this paper aims to analyze the rights of taxpayers and what is the detrimental effect imposed by the union budget 2021 on such rights, including the rights of corporations.

Rights of Taxpayers[1]

The Union Budget of 2020 has introduced a new Taxpayer Charter which talks about the rights of taxpayers. These rights and duties include privacy protection, property confidentiality, and consequences for government abuse of authority. Some of the Fundamental Rights of Taxpayers in India are –

1. Right to Legal Certainty[2] – Individual taxpayers have the right to legal certainty, which restricts the tax authorities to take unfair or arbitrary measures against them. It also helps a taxpayer in making accurate predictions about his or her tax responsibilities and commitments, while also allowing him or her to believe that these rights cannot be altered arbitrarily. Coercive tactics, confidentiality breaches, and the ability to appeal are all addressed under India's Taxpayers' Rights Charter. Additionally, it also adheres to the principle of finality in judicial proceedings and the statute of limitations on legal and government activities. Citizens have the right to peaceful enjoyment of their property based on legality unless otherwise stipulated by law. Legislative permission is required for all tax-related actions, therefore taxing should only be done when required by law. If taxes are only levied if permitted by law, then taxpayers will only be responsible for paying those taxes that are mandated by law. Some nations adhere to the universal concept of legal certainty, which states that tax officials are prohibited from negotiating or reducing a taxpayer's tax obligation. In several other nations, it's legal to do business online (Example: Plea bargaining in the United States).

 

2. Right to the Principle of Non-Retrospective Effect[3] – In India, taxpayers' rights include the ability to challenge the fiscal implications of the government's economic choices. As a result, any future retroactive tax adjustment would be unjust and infringe on his rights. Many nations' constitutions or civil laws prohibit making legal changes that have a retroactive impact. Mexico and Paraguay do not authorise them; although there are exceptions to the permits. Other countries that do not permit them to include Germany, France, India, Slovenia, and Sweden do not permit them. Laws enacted in the past cannot be applied retroactively in France. Retrospective criminal law is expressly forbidden by the US Constitution. When a taxpayer's current legal situation is irrational, ambiguous, technically insufficient, or it conflicts with a public necessity, Germany permits retroactive tax legislation.  Several nations do not regard this concept as a policy that must be followed by the government, but rather as a guideline. Technical fixes include closing tax loopholes. There are many instances where the European Court of Human Rights examines it. Similar rights can be seen in criminal cases where no new crimes may be created, and criminal penalties cannot be increased retroactively.

 

3. Right to Principle of Equality – Following the equality principle, tax legislation should be implemented equally and impartially regardless of the position of the individual concerned, excluding any exception. Furthermore, equality does not imply being identical, but rather being equal among others who are in the same situation as you are.  They ought to be equal in terms of legal and factual standing, as well as taxpaying capacity. This concept justifies government taxes in the face of public responsibility to fund government spending. It does, however, limit the government's ability to levy taxes in areas where there is no current, real, or effective taxpaying potential present. Taxes should not be a means of extortion. Taking a significant or excessive percentage of a taxpayer's income is considered confiscatory. Additionally, it should be proportionate to the actual economic capacity or ability to pay, whichever is greater.

 

4. Right to due process and adequate judicial review – Substantive or procedural rights of taxpayers are possible. The preceding concern is with the tax law's effectiveness, operation, and implementation. Protection against discrimination, exorbitant taxes, and backward-looking laws are all part of it. Regulatory and administrative measures, tax collection, and enforcement problems are all part of the discussion. The information of taxpayers must be kept secret by the authorities. In many countries, making a transfer pricing statement is a criminal offense. It is possible to exchange or reveal information based on a court request or an agreement in writing (e.g. tax information exchange agreement or TIEA).  Be it in a court of law or an administrative process, a taxpayer has the right to a defence. In addition, this right encompasses the ability to access the courts, the right to be heard, the right to provide or present evidence, and the right to a fully supported judgment. In most cases, no regulatory measures are required to protect these rights.

 

OECD Report on Taxpayers Rights and Obligations[4] – There are rules in most nations that govern the rights and obligations of taxpayers when it comes to taxes. A report titled "Taxpayers' Rights and Obligations – A Survey of the Legal Situation in OECD Countries" was prepared in 1990 by the OECD Committee on Fiscal Affairs and published by the OECD in Paris. India’s charter for the rights of taxpayers has been derived from this report. Basic taxpayer rights and responsibilities were found to be present across all systems, according to the results of the study.

1. Right to Be Informed, Assisted, and Heard – Providing taxpayers with up-to-date information about how the tax system works and how their taxes are assessed is a basic constitutional entitlement. They have a right to be informed, and this includes the appeals rights of Indian taxpayers. As a result, taxpayers may expect that the information given to them will accurately represent the complexities of their tax position.
2. Right To Appeal – All taxpayers in India have the right to appeal tax authorities' judgments under the country's taxpayer rights legislation. All tax authority judgments on the implementation of the law or administrative judgments immediately affect the taxpayer.
3. Right, To Pay No More Than the Correct Amount of Tax – Taking their circumstances and income into consideration, taxpayers should not be forced to pay more tax than the law requires. In other words, although it is permissible to lower one's tax burden via tax planning that is legal, governments distinguish between this kind of tax planning and tax minimizing that is illegal.
4. Right To Privacy – Taxpayers may be certain that the government won't unnecessarily pry into their personal lives. For the most part, this means avoiding pointless searches and asking just the information necessary to figure out how much tax is owed in the first place. A tax officer entering a person's home or company to conduct an inquiry and collect information from third parties is considered intrusive.

The constitutional protections provided by JUSTICE K.S. PUTTASWAMY (RETD.) , AND ANOTHER VERSUS UNION OF INDIA AND OTHERS [2017 (8) TMI 938 - SUPREME COURT] [5] enhance a taxpayer's right to privacy. If the Data Protection Bill of 2019 is passed, these rights will be further discussed. However, although the Bill gives the government more access to personal data, other sections proclaim the state to be a "data fiduciary". As a result, the state may be held responsible for any violations.

The Company possess these Taxpayers rights

When a business is legally incorporated, it becomes a separate legal entity from its founders. Members of the corporation are separate in law from one another. Its assets and liabilities are different from those of its members, and it has its name and seal. Owning real estate, taking on debt, taking out loans, opening a bank account, hiring employees, signing contracts, and suing and being sued independently are all options available to it. The case of Salomon vs. Salomon & Company Ltd[6], in which the House of Lords set down these fundamental principles of company law, was a landmark decision in English law and applies to India as well. Salomon’s case concept, which established that a business has a distinct legal identity from its stockholders, has been used in a variety of situations. The company has rights and is obligated to perform certain responsibilities under the concept of a separate legal entity.[7]

How have Government Policy Changes affected the Rights of Taxpayers?

The Finance Minister of India unveiled the Budget 2021-22 on February 1, 2021, which had many commendable features, including not increasing the burden on taxpayers, significantly increasing capital expenditure, and choosing to go beyond the fiscal deficit target of 3.5 percent to spur economic growth while also announcing disinvestments to close the gap. However, the sudden replacement of two quasi-judicial agencies with administrative bodies is one of the changes not disclosed in the Budget speech but referenced in the Finance Bill, 2021. Therefore, it becomes important to understand the impact of Union Budget 2021-22 on the rights of taxpayers, including companies.

1. Positive effect on Taxpayers Rights –

It's better to be late than never, in my opinion. This phrase sums up many people's response to the government's recent decision to stop retroactively amending the Income Tax Act when it believed the ambiguities in the legislation prohibited tax from being paid in India. This was in response to the Arbitral Tribunal's judgment in the Cairn India case, which ordered the Indian government to pay $1.2 billion with interest. If the money was not repaid, Cairn was given the authority to take foreign sovereign assets. The government's decision to end the practice of retroactive taxes was taken up by the Finance minister where she presented a Bill in Lok Sabha recently. This bill was supported by both the houses and received the President’s assent in a week. The main reason for support of this Bill was its aim to end the retrospective effect of legislation and such a right is also possessed by the taxpayers, including Company. 

2. Negative effect on Taxpayers Rights[8] –

There is now a "Board for Advance Rulings" made up of two officers, not below the level of chief commissioner, each appointed by the CBDT to replace the AAR. No one, not even the IRS, will be bound by the new "Board for Advance Rulings" decisions in advance of the Income Tax Department (ITD). The applicant or ITD may take the Board's order to the High Court for review. Existing taxpayers who went to the AAR hoping to get a binding judgment on complicated foreign tax issues will be very disappointed. The idea that the ITD might challenge the Board's decision will only serve to diminish the importance of this body.

A time limit was included in the Income Tax Act for proceedings before the ITSC. To prevent lengthy litigation and exemption from penalty and punishment under the Income-tax Act, it gave taxpayers a way out. It also enabled the government to collect taxes more quickly and reliably. Removing an application from consideration by the ITSC ends the proceedings relating to that application on the date of withdrawal, and the taxpayer forfeits immunity from penalty and prosecution. Before the application to the ITSC, any AO or other income-tax body that has jurisdiction over the matter would rule on it. Those who have cases pending with the ITSC at different stages of the settlement process will be treated unfairly, and the interests of litigating taxpayers will be compromised as a result.

According to the Finance Bill, the IRS will not be allowed to utilize the taxpayer's materials and other information provided to the ITSC, or the findings of the inquiry conducted, or evidence recorded by the ITSC during proceedings before it, for its purposes. We'd be wasting the ITSC's and taxpayers' valuable time and resources on this pointless appeal.[9] Additionally, the income tax authority will have the right to use information gathered by the AO, or the results of the inquiry conducted, or evidence recorded by the AO in any other proceeding under the Income-tax Act, regardless of whether the taxpayer or the Assessing Officer provided the same information or evidence before the ITSC. Taxpayers are compelled to choose between withdrawing or continuing their claims before an Interim Board without understanding the specifics of the new settlement plan they've been offered. This will result in blatant misuse of authority and a miscarriage of justice.

Way Forward

The Taxpayers' Charter 2020 is a key initiative that provides taxpayers with protections. When the rights and responsibilities outlined in the charter are examined in-depth, new viewpoints arise. Although the charter is made legal by the income tax law, the mechanism for enforcing it has to be strengthened. It may not have the intended effect if it is not enforced consistently, as previous administrative efforts have in the past, such as the uneven implementation of the Large Taxpayers Unit or the ultimate elimination of the Income Tax Ombudsman.

There is a detrimental effect on the investment environment, as well as on our country's image and ease of doing business as the decision to replace two quasi-judicial bodies with administrative Boards. The Chief Commissioner of Income-tax is the first in India's tax litigation hierarchy (Appeals). These administrative Boards will become obsolete if the quasi-judicial authorities are replaced by administrative bodies made up of chief commissioners of income tax. Once all outstanding cases have been resolved, the government should remove these quasi-judicial powers. During the current budget session of Parliament, the government should reverse its decision to terminate suddenly the activity of both the quasi-judicial bodies and to shorten the limitation period to three years in all evaluations. Instead of establishing new tax administration organizations, the government could expand the number of judges and benches available to resolve all outstanding legal disputes.

The right of taxpayers in India are inalienable and they have to be respected by the Government in every circumstance. Any policy which directly impacts such rights of taxpayers should be considered null and void since its implementation. As an opportunity, governments should take note of the OECD's recent decision to impose a global minimum tax on top multinational corporations operating across several countries. Because no one tax jurisdiction can use the OECD's proposed methodology, different concessions must be given in different countries. The government should re-examine its Double Tax Avoidance Agreements with major nations once the fundamental structure for a global minimum tax is complete. As a result of these agreements, if any income is taxable in India, it must be included in the global minimum tax. Furthermore, the General Anti-Avoidance Rule (GAAR) and advance pricing agreements (APA), both of which fall under the umbrella of international taxes, should guarantee that India's practice of retroactive taxation is a thing of the past. Therefore, the government needs to keep in mind the rights of taxpayers including the corporates and make policy changes accordingly.     

 

[1] ‘Rights of Tax Payers in India | Rights and Responsibilities of Taxpayer India’ (Taxolawgy, 28 June 2019) accessed 21 October 2021.

[2] ‘Taxpayer Rights: Seeking a New Dawn for Nation-Builders - The Financial Express’ accessed 21 October 2021.

[3] ClearTax, ‘Taxpayers Charter Defines Taxpayers Rights and Obligations under the Income Tax Act’ accessed 21 October 2021.

[4] ‘Taxpayers’_Rights_and_Obligations-Practice_Note.Pdf’ accessed 21 October 2021.

[5] (2017) 10 SCC 1.

[6] [1897] AC 2.

[7] ‘Separate Legal Entity of a Company’ accessed 21 October 2021.

[8] ‘How Budget 2021 Has Reduced Taxpayers’ Rights - The Financial Express’ accessed 21 October 2021.

[9] ‘Company Laws In India’ accessed 21 October 2021.