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In her July 2024 budget, the finance minister announced a comprehensive review of the Income Tax Act, 1961. This was to be a six-month plan targeting disputes and litigation and making the act lucid, concise and easy to read.

The government invited public suggestions in four categories: Simplified language, reduced compliance, reduced litigation and elimination of redundant and obsolete provisions. By November, 6,500 suggestions had been received, and 22 sub-committees formed to examine them. It appears the government wants to introduce a draft bill in the budget session.

According to a 2022 global survey, India numbered 50 out of 64 of the most complex tax jurisdictions. Leading economies such as Canada, Brazil, Belgium and Italy were more complex than India. The country¡¯s tax complexity index was 0.42, one being extremely complex. It was 0.39 for the US and the UK¡¯s was 0.38. Switzerland and Singapore were the least complex jurisdictions at 0.23 and 0.26. These statistics indicate that India is not alone on the list of jurisdictions viewed as complex.

Tax experts around the world agree that simplifying tax legislation is not easy. Complexity breeds complexity. The principles of taxation are that tax can be levied only by the authority of law and that tax must be levied impartially. Relaxation of tax laws to achieve economic policy objectives must follow this non-discriminatory approach. A set of anti-abuse measures is also needed to accompany any relaxation of tax laws. Complexity of tax laws is exacerbated by the interplay between formulating, implementing and monitoring.

The problem undermining our tax system, however, is not complex legislation but trust deficit. This exists at both levels ¨C between taxpayers and the tax administration and within the tax administration itself. From experience, administrators are reluctant to side with taxpayers lest they be questioned by their superiors or singled out for internal audit. Inevitably, the task of granting relief if left to the judiciary, allows administrators to avoid responsibility.

As law and jurisprudence mature, disputes have moved to the facts of taxpayers¡¯ claims. However, taxpayers still share information only on a need-to-know basis. This attitude exists both at an organisational level and in what taxpayers share with the administration. Organisations view tax as a compliance function, and information is shared only on a need to know basis. However, tax pervades every aspect of a business, including the appointment of executives and people, the work of staff, expansion of the business, daily expenses and investments. Something as innocuous as reimbursing an expense or a visit by an overseas employee may have significant tax implications depending on what the person does during their visit. The way in which board appointments are made, decisions taken, minutes recorded and bank account signatories authorised may have similar ramifications. The tax department may not be privy to all relevant information until it receives an enquiry from the tax office. Tax leaders may not be experienced or assertive enough to demand material that allows them to file accurate returns, and company leaders may not be looking far enough ahead to keep the tax head fully informed.

Even when they do have sufficient information, taxpayers are often selective in sharing information with the tax administration. They may wish to protect business secrets, be unwilling to educate or prevent the abuse of information. An increasingly fraught series of audit questions and answers may ensue. This can lead to disputes as to the burden of proof and the principles of natural justice.

Thus, to this extent, simplifying the law may not take away inherent complexities that arise simply due to a trust deficit. Moreover, simplifying the language of the tax law is not just making it broad and all-encompassing, as may be the first instinct of the administration. Greater globalisation has seen cross-border trade making up nearly 50% of º¬Ðß²ÝÉçÇø GDP. Global understanding, therefore, has to be considered. Broad, all-encompassing language in domestic law will significantly increase cross-border disputes because the understanding of treaty partners may be very different.

The UK¡¯s tax language simplification took more than a decade. Instead of an ambitious six-month plan, the government could learn from the efforts of other countries and then set out a step-by-step plan. Simple tax language that becomes a breeding ground for disputes, particularly involving cross-border transactions, will certainly be antithetical to the ambitions of the finance minister.

Seema Kejriwal Jariwala is a partner at BMR Legal.