Taxman will not play policeman, FM assures India Inc

Finance minister Pranab Mukherjee on Sunday assured India Inc that income tax (I-T) officials would not be allowed to act as policemen.

The assurance came amid apprehensions that tax commissioners would have powers to arrest industrialists or company officials under new provisions of the General Anti-Avoidance Rule (GAAR) after retrospective amendments to the Income Tax Act.

Interacting with CII officials, Mukherjee made it clear a plethora of cases would not be reopened for scrutiny simply because amendments were being made with retrospective effect from 1962.

He sought to know from the industry if it wanted India to become a no-tax country.

Finance ministry officials have been saying the Vodafone-Hutchison deal is not a case of a double taxation avoidance agreement but of non-payment of taxes anywhere.

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Mukherjee said if retrospective amendments were not made from 1962, those who had paid taxes would ask for the money back. He clarified he was not making a theoretical plea, but six such requests had reached him already.

GAAR is one of the elements of the Direct Taxes Code (DTC) proposed in the Budget. The rule is aimed at complicated deals where one of the purposes is to avoid tax.

The industry apprehension is that under the garb of GAAR, tax officials would act as policemen and arrest them on one plea or the other.

According to the proposed rule, the assessing officer will make a reference to the commissioner of income tax if he is satisfied that a particular deal is aimed at avoiding tax.

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After being satisfied, the commissioner concerned will refer the matter to a three-member approving panel, comprising officers of the rank of commissioner or above.

The panel will have to decide the case in six months. The industry feels the panel would have the power to arrest.

Industrialist Rahul Bajaj told the finance minister, "Anti-avoidance rules are welcome, but you can't arrest a guy on the authority of even a commissioner or even the CBDT chairman. There must be a judicial body authorising an arrest, it cannot be left to the income tax department."

Mukherjee said to that the job of the tax department was not of a policeman. "We are concerned about realisation of taxes and not to sit on judgement whether it is a crime or not." He agreed the authorities would have to be careful in implementing GAAR provisions.

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On Bajaj's observation that the Supreme Court had interpreted the law in a particular way and the ministry's review petition fell flat in the apex court, Mukherjee reminded him a number of times the law had been amended with retrospective effect in the backdrop of court orders.

"The Supreme Court is the ultimate interpreter of the law. The moment the court instructed and the review petition was rejected, I instructed the department to return the money," he added.

Pointing out that GAAR provisions may lead to harassment, PwC India executive director Rahul Garg said the rule per se did not have provisions to arrest people.

It was a rule of evidence and it was up to the tax assessee to prove a particular deal was not done to avoid taxes, which may be difficult, he said.