Tax Terrorism

Tax authorities have issued a reminder to Vodafone Group Plc asking the company to pay Rs. 14,200 crore of tax dues — that the U.K.-based firm has referred to international arbitration — or risk having its assets seized.

What do you understand by ‘tax terrorism’? It is said that Indian entrepreneurs are faced with instances of tax terrorism affecting their morale. Critically examine. (200 Words)
‘Tax Terrorism’ essentially means undue exercise of power by tax authorities to levy taxes using legal or extra-legal means. The Vodafone case is a classic example, when despite a SC order ruling in favor of the company, tax laws were amended, retrospectively, in a manner that Vodafone was made liable for a tax on past transactions. Essentially, tax terrorism is an outcome of the existing tax framework.
  1. Complex tax structure — Numerous taxes apply even on seemingly simple transactions. Such a web of taxes acts adversely to smooth flow of business.
  2. Ambiguity in laws — This bends the law in favor of those who implement it. Vague definitions have led to dispute over applicability of MAT, CGT etc. in cases like the Vodafone.
  3. A weak advance ruling mechanism allows tax disputes to arise, which ultimately get solved in courts.
  4. High handedness — The IT Act allows CBDT to send notices just based on suspicion that one has under-reported his income or miscalculated taxes. Such discretion on the authorities, at times, is misused.
  1. Ease of doing business ranking (142/188) is a testimony to the tax terrorism. Foreign investors fear such tax terrorism.
  2. This has resulted into non-compliance even by the entrepreneurs who are willing to comply since either way they are prone to litigation.
  3. Such opaqueness about tax obligations results in lack of predictability in incomes and hence, difficulty in charting out future plans.
However the issue could be resolved through a range of measures:
  1. The Advance Ruling Authority could be given more teeth. This would avoid unnecessary litigation.
  2. Simplifying indirect tax structure through implementing the GST would be positive for the health of the private sector in India.
  3. The Direct tax code could be implemented to disentangle the direct tax framework. However the GAAR provisions must be revised, may be to SAAR.
  4. The Corporate law service cadre could assist in creating synergy between tax authorities & corporate sector.
  5. An Anti-tax Terrorism Bureau could be setup with quasi-judicial powers to investigate & rule on cases of tax terrorism.
To unlock India’s true economic potential, public & private sector need to work together, & not at loggerheads. Tax evasion must be eliminated root & branch, not through tax terrorism but tax compliance



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