IT Act Amendments: Why Even Honest Taxpayers Should Be Afraid

The amendments to the Income Tax Act have glaring loopholes, and may allow abuse of provisions by authorities.

Update: The Finance Bill 2017 was passed by the Lok Sabha with a voice vote on March 22.

Imagine you hear your doorbell ring loudly at 6 am in the morning. When you groggily reach the door, you find income tax officers standing outside. They demand to be allowed inside to search your house. When you ask them for reasons, they simply shoulder their way in.

When you frantically call a lawyer, one of the officers tells you that you can’t even challenge the raid before the tax tribunal. On their way out, the officials pick up your TV, saying it’s in their interests to do so, even though they’ve found no undisclosed assets.

Does this sound impossibly dystopian to you? Think again, because now that the Finance Bill, 2017 is passed, this could get very, very real.

The Budget Session resumed on 9 March 2017. While there are many provisions in the Finance Bill, 2017 that certainly merit extensive debate, the ones that perhaps most urgently require attention relate to the powers of income tax authorities.

Previous articles on this website and elsewhere have highlighted how income tax authorities no longer need to provide reasons for conducting raids under the Income Tax Act 1961, and the transparency issues this could create.

But there’s more. A whole lot more.

Free Reign to Tax Authorities

Apart from no longer requiring authorities to provide reasons for tax raids (except in limited circumstances), under the Finance Bill:

• Tax authorities can provisionally attach any property of a person being raided, for utterly vague reasons
• Tax authorities can enter any place where a charitable activity is taking place to survey it, and get any person working there to provide them with any information they feel like
• Tax authorities can open cases into assessments from 10 years back based on evidence found during a search

The government, beating its anti-black money drum, claims all these changes are meant to be in the best interests of the country. But a slightly more 'woke' study of the provisions in the Finance Bill reveals an array of provisions that are ripe for significant political and institutional abuse. With these proposals dangerously close to becoming law, we give you the lowdown on the clauses that everyone should be worried about.

Also Read: Mr Jaitley, It’s Time to Question Relevance of Personal Income Tax

1) No Need to Provide Reasons for Raids (Clause 50 of the Bill)

Section 132 of the Income Tax Act 1961 empowers the income tax authorities to conduct search and seizure operations. To do so, the authorities must have “reason to believe” that a person is not willing to comply with a summons to produce information required by the authorities, or that a person is in possession of assets that they have not disclosed for income tax purposes.

The Finance Bill 2017 proposes to amend this provision to clarify that the “reason to believe” does not need to be disclosed to any person or any authority, including the Income Tax Appellate Tribunal.

To break it down, what this means is that if the income tax authorities conduct a raid on your premises, they will first not need to provide you with any reasons for this. Prior to this, the authorities used to have to provide a satisfaction note describing their reasons to you. 

Nor can you raise any objections regarding the reasons for a raid before any of the authorities/appellate tribunals specifically created to deal with objections against tax assessments, including, according to multiple High Court decisions, search and seizure operations.

This may not seem like a huge deal to the average person. First off, you may consider yourself to be a law-abiding, taxpaying citizen, so why worry about raids? Secondly, the proposal doesn’t say reasons don’t have to exist, and in fact does not preclude the submission of reasons to the courts.

It isn’t that simple, of course. As illustrated in this informative article by Ajay Mankotia, a former revenue officer, the basis on which raids are conducted can be extremely dubious, involving informants with grudges, or instructions from high-powered officers, or even just an income tax officer’s mistake.

One of the checks on the process being too arbitrary was the fact that a raid could be challenged fairly early on in the appeals process by a victim, and in a convenient manner, before the tax tribunals.

Now, the income tax authorities will find themselves with more scope to act with impunity, as the only way to challenge the validity of a search operation is to file a writ before the High Courts or Supreme Court. Doing so is more expensive, and far more complicated, especially for someone not living in Delhi or a city with a High Court and would in any case mean waiting years before the matter is heard.

Oh, and don’t forget that the amendment is retrospective, going back to 1962. Which means that if you’re party to a pending case where you were challenging reasons, you just had the rug pulled out from under you. Because this means that you may have to now move the High Court or Supreme Court in the matter and the money you had spent on the case thus far will be wasted.

Also Read: One Person Owes 11% of India’s Total Pending Income Tax in 2014-15

2) Provisional Attachment of Property During a Raid

An even more insidious set of proposals that have flown completely under the radar are a new set of sub-clauses in section 132 dealing with provisional attachment of property.

Previously, the only items that could be seized during a raid were the books of accounts or assets that were the subject of the raid. So, if the authorities raided you, and the raid turned out to be unfounded, at least you would be able to get on with life, without any loss of your property.

If the new provisions are approved, however, authorities can provisionally attach any property of the person raided, if they feel this is necessary to protect the “interest of the revenue.” The interest of the revenue, in case you didn’t guess, is a nicely vague term that has no basis in statute or case law and is therefore readymade for abuse.

So, if the authorities want to pressurise you, or are under pressure to demonstrate results, boom – your house could get provisionally attached, leaving you out on the street. 

Or it could be your business assets, bringing your livelihood to a halt and rendering you bankrupt. Or it could be your phone, which, let’s face it, is the worst thing of all. Ok, maybe not the worst, but unthinkable nonetheless.

Defenders of the Bill may argue that the provisional attachment is only for 6 months, so there’s no big deal with it. An argument which conveniently ignores the fact that losing any of the things mentioned in the previous paragraph for 6 months would be devastating, unless of course you were filthy rich and could just get more of them. And also chooses to conveniently ignore the glaring absence of any provisions dealing with:

• how provisionally attached property is to be safeguarded during the 6 months
• returned to its rightful owner when the 6 months are up
• how an owner can get his or her property back if it is not returned
• how an owner can claim compensation if the property is damaged

3) Surveys on Charities (Clause 53 of the Bill)

The next lovely addition to our Rogues’ Gallery of Tax Provisions is not surprising. This government has proved itself to be no friend to charities, because, of course, those pesky charities are actually all just foreign agents who are trying to stall India’s amazing economic growth. Never mind any actual good work they’re doing, like helping the poor or fighting for oppressed people’s rights or drawing attention to abuses by the state, they’re all anti-national.

So, it is perhaps inevitable that the Finance Bill includes an amendment to section 133A of the Income Tax Act. This section currently allows tax authorities to enter any place where a business or profession is carried out, to conduct ‘surveys’ of the property, including demanding any proprietor or employee provide them with any information they ask for.

The provision is perhaps already quite draconian, but the government has realised it can do even better. Under the new proposal, tax authorities will have unrestricted rights to enter any place where an “activity for a charitable purpose” is carried out, to carry out these ‘surveys’. 

Furthermore, they can order anyone present at the place, even a volunteer assisting in that charitable activity, to provide them with any information regarding the books of accounts of the charity, or any other information that they feel like.

It doesn’t require much imagination to see how this provision can be used to harass charities, disrupting activities organised by them, scaring off potential volunteers.

This may seem a bit over-conspiratorial, but the manner in which a number of charities have been targeted even without this provision would suggest that such scenarios are not so outlandish. I’m pretty sure Compassion International, which commits the horrible crimes of feeding children and providing them with medicines, would agree with the assessment at any rate.

Also Read: IT Data Reveals Only 2% Companies Pay 92% of Total Corporate Tax

4) Opening Investigations into Assessments After 10 Years (Clauses 59 and 61)

This proposal would perhaps not be so bad if it were not for the fact that it is linked to the general section on search and seizure dealt with above. Under the current law, if a search conducted under section 132 yields sufficient evidence, then the authorities can look back into the last 6 years of assessments of the person, to see if there were any irregularities.

The new proposal stretches this power to 10 previous years, provided a higher threshold of evidence is met, and the suspected non-disclosure of assets is worth more than Rs 50 lakh. In itself, it actually seems like a decent proposal that actually targets those with deep pockets who are likely to have evaded tax.

However, the proposed amendment regarding non-disclosure of reasons for tax raids will end up tainting this proposal as well, as the authorities could end up not providing any reasons for the initial search or for then wanting to reopen the old assessments, which could cause severe hardship to innocent taxpayers.

A Successful Smoke and Mirrors Game?

A recent piece in Outlook India made an interesting case that the recent Ramjas incidents have conveniently been able to distract us from paying any attention to the Budget provisions. Last year as well, with controversial new rules on political funding being introduced, the JNU controversy captured everyone’s attention and ensured the Budget was passed smoothly.

A similar strategy recently worked spectacularly in the USA as well. Amidst the uproar created over the first Trump travel ban, most people did not realise that Steve Bannon, Trump’s controversial strategist best known for previously heading alt-right news network Breitbart, had secured a permanent seat on the US National Security Council.

The proposals in the Finance Bill to amend the tax authorities’ powers are incredibly dangerous. Introduced as moves to crack down on the legitimate issues of black money and tax avoidance in the country, they were already more likely to be viewed favourably by the public.

The recent spate of headline-grabbing news relating to free speech and violence against dissenters has ensured that they have received even lesser scrutiny than they would have in the regular course.

And yet, as discussed above, the potential for their abuse, not even with malice, but merely because of incompetence, is staggeringly high. If elements of malice actually do enter the equation, either because a government wishes to crack down on a dissenting anti-national, or if someone who has the right friends among the tax authorities doesn’t like what you’re saying about them, these provisions could be used to cause untold harm.

So hope these provisions don’t get passed on the floor in this session. Constituents, make some noise. Parliamentarians, do the right thing. And everyone, watch out for the taxman.

(The writer is a lawyer qualified to practice in India, and England and Wales, and can be reached @VakashaS. He is currently working with Rao Law Chambers, a boutique tax advisory firm in Bengaluru. This is an opinion piece and the views expressed above are the author’s own, and not representative of Rao Law Chambers or The Quint. The Quint neither endorses nor is responsible for the same.)

Also Read: Ready For the Knock? Taxmen Now Free to Raid Citizens on a Whim