Tax law, especially Indian tax law discussions are far too often contained by self-sustaining logic of statutory provisions and case laws. Tax lawyers, including me, feel validated and satisfied having decoded a particular judgment or the meaning of a provision. The satisfaction is often short lived because another judgment or amendment is on the horizon. Else, another Press Release, Circular, Notification, Clarification of the Circular, Amendment to the Notification, Guideline, Order that needs to be read. If we don’t keep abreast, we risk losing clients for missing a deadline of tax return, or failure to obtain tax refunds, or for our failure to render a timely advice. Where does the Budget fit in such daily scheme of things for a tax lawyer?
In not many places. But, it should.
In the Budget of 2020-21, for example, it was announced that the Union of India has decided to abolish Dividend Distribution Tax (‘DDT’). It was crucial information. As a tax lawyer I certainly need to know that w.e.f. 1.04.2020, shareholders and not companies are obliged to pay income tax on dividends. Unfortunately, the curiosity of most tax lawyers stops here.
Ideally, and this is where I aspire to make my case: a tax lawyer should also know why the change was introduced? Union of India introduced DDT in 1997 reasoning that it was easier to collect tax on dividends in the hands of companies itself? It was easier to administer tax law over companies than large swathe of shareholders. Subsequently, ‘Buyback Tax’ was also introduced to plug the loophole of companies avoiding payment of DDT. What changed in 2020 to prompt the Union to upend its policy of taxing dividends in hands of companies? Especially when the no. of shareholders had increased multifold since 1997. Is it because the earlier was policy ill-conceived to begin with? Or is it that despite the large no. of shareholders it was easier track online payment of dividends? Dividends ‘should’ always be taxed in hands of shareholders is not a convincing explanation. For such an explanation impliedly castigates the introduction of DDT and its continuation for close to two decades.
Now, of course, most practicing tax lawyers are likely to consider the above as superfluous inquiries. Or inquiries that are best addressed by academic lawyers. But that hardly changes the reality that most tax lawyers aren’t curious beyond the immediate needs of their clients. And many don’t have the luxury to meet such curiosity. But I would like to state that understanding reasons for major tax policy changes helps us better anticipate future changes, if not predict them. And ability to anticipate policy changes is an underrated but core quality for many lawyers, not just tax lawyers.
To take another example, the Budget of 2022-23 revealed that cryptocurrency transactions are no longer in a tax vacuum and will be subject to a flat tax rate of 30%. Not much explanation was forthcoming for the punitive tax for cryptocurrency. But most tax lawyers worth their salt knew that the tax rate was a clear signal to discourage cryptocurrency transactions in India. The prelude to ‘crypto tax’ where RBI attempted to shackle cryptocurrency exchanges should have offered enough clue about the direction of regulatory environment for cryptocurrency in India. But, is it enough for a tax lawyer to know that the Budget has introduced new provisions relating to cryptocurrency transactions in the Income Tax Act, 1961? I guess you know my answer by this point. In my view, timely advice for clients for cryptocurrency transactions was ‘before’ the provision was introduced, not ‘after’. Thus, merely knowing the provisions once they are on the book is not enough. We need deeper and better understanding of the winds of change and their direction.
But does the Budget tell us more?
Yes, it does. (Especially if you can sit through the entire Budget Speech!)
Sometimes it tells us that when it comes to taxation, the Union of India operates in mysterious ways. And making anticipating changes may not always be a straightforward task. Because, I think, sometimes it is a mystery to the Union itself as to what tax policies it is enacting and why is it making certain tax policies. The Union of India, can, for example, attempt to ‘rationalise’ capital gains tax by completely doing away with indexation benefits in one sweeping announcement as in the Budget of 2024-25. Done and dusted. Or so it thought.
And once the Union of India failed to fully explain its decision and received a wave of backlash, it amended its rationalization by introducing a grandfathering provision to ensure that the investments made before 23.07.2024 continued to receive the indexation benefits.
One explanation for removing indexation benefits was to remove difficult and complicated calculations from the IT Act, 1961. Instead, the Union of India argued, it was better to prescribe a single capital gains tax of 12.5%. But what we now have instead is that for properties bought before 23.07.2024, taxpayers have the option of choosing between an indexation benefit or a capital gains tax of 12.5% from 2024 onwards. Simplification, they said. Dual options for taxpayers were created instead. And no, more is not merrier in every context.
On second thoughts, maybe Union of India’s approach to tax policy is not a mystery. Maybe the goal is to try and see if through ‘shock and awe’ a policy change can be pushed through. If not, it is prepared make some prudent concessions that should have been incorporated in the first instance itself.
Apart from the ‘whys’, Budget thus also reveals the ‘hows’ of tax policy changes. Is it a sledgehammer approach, a genteel incremental path, or a passionate persuasion for a change that the Government in power is advocating. Example: rumors that the Budget of 2025 will introduce a new Income Tax Bill. And there isn’t much disbelief about the rumor. An entirely new legislation on income tax is rumored to be introduced in a couple of days and the public is yet to see a draft version. When the Government in power is not averse to such a ‘hide and seek’ way of operating, it becomes a necessity for tax lawyers to be in tune with the Annual Budget.
Further, the Budget reveals a lot about the nature of time.
It is trite that laws can be amended or repealed. Statutory provisions can be replaced. And effect of unfavorable judgments can be nullified. But each year the Budget tells us that time does not move only in one direction. Linearity of time is a myth. Tax laws can be amended in 2025 ‘with effect from’ 2017, 2000 or even 1961. For example, there is a distinct possibility that through the Budget of 2025, CGST Act, 2017 will be amended to replace the words ‘plant or machinery’ with ‘plant and machinery’ to negate Supreme Court’s judgment in Safari Retreats case. The GST Council has recommended the amendment be effectuated retrospective effect, i.e., from 2017. Tax lawyers are so used to retrospective amendments that they no longer battle an eyelid when another such amendment is announced. But maybe we should battle an eyelid and more. And ask the tough question: why? Why is it not enough to amend the law w.e.f. 2025? Why do we have to travel back in time and amend it w.e.f. 2017? Can the Union of India, for once, accept it made a legislative oversight/error, change the law and move forward.
English grammar tells us that conjunctions are important. The expected turn that the Safari Retreats case will take can tell us that conjunctions can be fulcrum of a long litigation battle that may award half a win to the taxpayer, but the Budget will convert it into a full loss. And tax lawyers are none the wiser. Not a great commentary on tax law and its practitioners.
In formal legal language, Annual Union Budget is many things at the same time. It is the Annual Financial Statement as per Article 112 of the Constitution, Finance Bill when introduced, Finance Act once Parliament approves it, a tool to amend past financial mistakes, and a platform to unveil not a financial but also socio-economic vision of the future.
In common parlance, Annual Union Budget presents an opportunity to demand ‘relief for middle class’, ‘create investment opportunities’, ‘attract FDI’, and of late hurtle us towards the promised land of ‘Viksit Bharat’.
But for us tax lawyers, the Budget is also an opportunity to examine if the tax policies are adhering to the enduring canons of taxation propounded by Adam Smith. About time that the examination is public, expressive, and articulate instead of just being reactionary.
Finally, Budget reveals numbers. It a statement of expenditures and revenues of the past financial year. And proposed expenses for the upcoming financial year. But that’s only one part of a larger story.
Of late, tax collections are soaring. Undoubtedly. GST collections have only shown an upward trend post-COVID. And the trajectory will likely continue in that direction if there an income tax relief in the Budget of 2025. Income tax relief generally increases cash in hand for taxpayers which in turn will likely spur consumption and generate revenue via GST. So, a further bump in GST collections means a chance to spin the success story of Indian tax policy, including but specifically of GST. But numbers should never be enough.
To use an analogy: as a tax lawyer, receiving client fee is crucial. Even necessary. But fee cannot be the only barometer of success, no matter how tempting it is to equate money with success.
If numbers were the ‘be all and end all’, equalization levy was a roaring success and angel tax mopped up some revenue as well. Former is being phased out and latter was abolished via the Budget of 2024-25. Ending the life of both taxes should not be a cause for celebration if numbers are the only touchstone on which success of taxes is to be judged.
Numbers reveal a story and hide another one. It is upto us what we make of them. If the no. of people filing income tax returns has increased, it is worth applauding. Not so, if they are only filing returns and not paying any effective income tax. Reducing corporate tax rates was supposed to be an incentive for spurring investments, but reduced corporate tax collections since the rate reductions may tell a different story. Ever increasing GST collections may reveal success, but if the burden of GST is primarily being borne by low earning groups, it calls into question the fairness of such a tax. And as much as tax lawyers believe that questions of fairness, justice, and equity are outside their realm, they stare us back in the face every now and then. We may choose to ‘hide’ behind the ‘logic’ and ‘coldness’ of statutory provisions, it won’t change the reality. And neither can we deny how Indian tax policy is increasingly being shaped without a meaningful contribution from tax lawyers.