What is tax terrorism?

Seven prominent Indian institutions, including the prestigious IIT Delhi and Anna University in Chennai, are facing a significant financial challenge: they have received showcause notices from the Directorate General of GST Intelligence (DGGI) for unpaid taxes on research grants given since 2017. This move has sparked a major debate within the academic community, with some calling it “tax terrorism”.

About Tax terrorism:

Tax terrorism refers to the misuse or overreach of tax laws by tax authorities, leading to harassment, intimidation, and fear among taxpayers. It arises when the enforcement of tax regulations becomes excessively aggressive, unpredictable, or arbitrary, causing undue burden on individuals and businesses. The term is often used to describe situations where the approach to tax collection is perceived as unfair or oppressive, hindering economic growth and creating an environment of fear.

Key Aspects of Tax Terrorism:

1. Ambiguity in Tax Laws:
   • When tax laws are vague or complex, tax authorities may interpret them in a discretionary or arbitrary manner, leading to unpredictable and unfair assessments.
2. Aggressive Enforcement:
   • The use of coercive measures, such as raids, fines, or retrospective tax claims, can create fear among taxpayers, even when they are compliant or acting in good faith.
3. Lack of Taxpayer Rights:
   • In cases of tax terrorism, taxpayers may have limited legal recourse or protection against unfair treatment, leading to prolonged litigation and increased compliance costs.
4. Retrospective Taxation:
   • A key contributor to tax terrorism is retrospective taxation, where tax laws are applied retroactively, causing businesses to face unexpected tax liabilities for past transactions. This has been a major issue in India, particularly after high-profile cases like Vodafone and Cairn Energy.
5. Economic Consequences:
   • Tax terrorism can discourage both domestic and foreign investment due to uncertainty and fear of aggressive tax enforcement. Investors and businesses are likely to avoid environments where the tax regime is seen as hostile or unpredictable.
6. Impact on Ease of Doing Business:
   • When businesses feel harassed by tax authorities, it hampers the overall ease of doing business in a country. This can lead to a flight of capital, reduced entrepreneurship, and slowed economic growth.

Reforms to Curb Tax Terrorism in India:

To address the concerns of tax terrorism, the Indian government has introduced several reforms aimed at improving the tax environment:

1. Faceless Tax Assessment:
   • Introduced to eliminate human discretion and reduce harassment, faceless tax assessments ensure that tax assessments are done through a central system without the taxpayer knowing the identity of the assessing officer.
2. Vivad se Vishwas Scheme:
   • Launched to settle long-pending tax disputes, this scheme allows taxpayers to resolve disputes with the tax department by paying only the disputed tax amount and receiving a waiver on interest and penalties.
3. Simplification of Tax Laws:
   • The introduction of the Goods and Services Tax (GST) and the gradual reduction of corporate tax rates are aimed at creating a simpler, more transparent tax regime.
4. Taxpayers’ Charter:
   • The Indian government introduced the Taxpayers’ Charter in 2020, outlining the rights and obligations of taxpayers and ensuring fair, courteous, and respectful treatment by tax authorities.