Tax systems prove taxing for taxpayers

In this case, the taxpayer received a demand of ₹2.01 crore from the Centralized Processing Centre due to an incorrect calculation of the surcharge on income tax at 37%. He challenged this incorrect demand in the Delhi high court, which dismissed the writ petition, saying the taxpayer had an alternative remedy of filing an appeal against the order. The taxpayer filed a special leave petition in the Supreme Court against the order.

The top court noted that the taxpayer had faced a similar demand of ₹1.33 crore for the previous year. In a writ petition to the high court that year, the tax department agreed to cancel the incorrect demand. Again, before the apex court, the tax department submitted that it had rectified the incorrect computation for the year in question.

However, the Supreme Court observed that the story did not end there. While the matter was pending before the top court, a demand of ₹63 lakh was raised for the following year, again due to an incorrect computation of the surcharge at 37%. The tax department explained that this error occurred because the Centralized Processing Centre had not adopted the mechanism of deleting excess calculation, as it was programmed to calculate and raise demand.

The apex court stated that the technological impediment could not be a reason for harassing a taxpayer year after year and that the income tax department must take immediate steps to update the software or take other steps to ensure that such a mistake does not occur in the future. Directing the cancellation of this new demand within six weeks, the court directed the Central Board of Direct Taxes (CBDT) also to take necessary steps to rectify the software.

A perennial problem

In this case, the demanded amounts were large enough for the taxpayer to take up the matter in court and pursue it up to the Supreme Court. There are thousands of cases of taxpayers with smaller demands, where their applications for rectifying the system's mistakes go unheeded. They are, therefore, left with no choice but to file appeals against such incorrect demands. This results in unnecessary waste of money and time for taxpayers. Not only that, appeals remain undecided for years on end, leaving the threat of outstanding demand hanging as a sword over the taxpayers. Often, notices are received to make payment for such demands or to adjust them against subsequent years' refunds, which have to be responded to promptly.

These are, in most cases, blatant mistakes in processing the tax returns, such as not giving credit for tax deducted at source (TDS) that appears in Form 26AS or incorrectly calculating some deduction or interest. At least if the software cannot be correctly designed—for which there can be no reason other than the lack of sufficient understanding, care, or testing before the launch—the process of rectifying mistakes should be simple, smooth and efficient. The process should not lead to taxpayers scratching their heads trying to figure out how they can ensure they are charged only the rightful tax due by them. Should this not be the least taxpayers deserve?

The software problems highlight another underlying problem—the complex tax computation provisions, with frequent annual changes to tax laws through the budget. There are so many permutations and computations—e.g. the old tax regime and the new tax regime, with differing conditions—that even India’s best software companies cannot figure out ways to correctly compute taxes. Should we have 100-plus amendments every year in the budget, necessitating frequent updates to the software? Can we not have a stable, unchanged tax system for at least five years so that we have a robust tax return processing system?

Gautam Nayak is a partner at CNK & Associates Llp. Views are personal.