Tightening the screws on tax exemption

Rahul Jain Updated on September 14, 2018

The provisions are to be interpreted strictly; the onus is on the taxpayer to prove eligibility

Time and again, we claim various exemptions from taxes provided under various statutes without realising the impact of the exemptions being claimed. However, exemptions can no longer be claimed nonchalantly.

The Supreme Court recently ruled that exemption provisions are to be interpreted strictly, and the onus is on the taxpayer to substantiate that he/she is eligible to such claim.

Strict interpretation

The court has held that law is to be generally interpreted in a manner so as to depict the true intention of the legislature. However, the above rule of interpretation is not applicable when interpreting tax laws.

A taxation statute has to be interpreted strictly. Logic/reasoning/implications/assumptions/references have no role to play in the interpretation of tax laws if the language of the law is clear.

The above principle laid down by the apex court stems from the power given to the government under Article 265 of the Constitution to levy or collect taxes from its citizens.

The court was of the view that the government cannot levy/collect the tax unless granted specific power under the Constitution — therefore, tax laws (including the exemption provisions contained therein) should be interpreted strictly.

This is because the government cannot be assumed to levy/exempt taxes which it is not otherwise authorised.

Accordingly, no attempt should be made to import a meaning/inference in the tax laws which is not specifically provided for under the exemption provisions.

Benefit of doubt to taxpayer

While determining whether any item or income is taxable or not, in the event of any ambiguity in the interpretation of such provisions, benefit should always be given to the taxpayers.

This is because if lawmakers have originally omitted an item from the tax net, such income cannot be taxed on the premise of the intention of the legislation.

Benefit of doubt to govt

On the other hand, when a taxpayer claims an exemption from a tax, which he/she was otherwise liable to pay, the exemption provisions should be interpreted strictly. The exemption not provided to certain items/types of income shouldn’t be extended in the case of an ambiguity, so to provide exemption to them.

In other words, the onus is on the taxpayer to prove that he/she is eligible to claim exemption from taxes.

Therefore, in the event of ambiguity in the interpretation of exemption provisions, the benefit would go to the revenue authority.

With the above ruling of the five-judge Constitution Bench of the apex court, all the earlier decisions giving benefit to the taxpayers under the exemption provisions, stand overruled.

This may lead to fresh litigation where tax authorities will seek to reopen cases where benefit had already been given to taxpayers on the basis of earlier rulings.

In this regard, a government clarification would really be helpful as it will ensure effective utilisation of government resources as well as the taxpayers’ money.

In the near future, taxpayers would have to judiciously plan their tax exemptions.

Taxpayers will have to maintain appropriate documentation so as to portray their ‘bonafide intention’.

This becomes more important not only in the light of the recent judgement of the Supreme Court, but also in light of the BEPS (Base Erosion and Profit Shifting) and GAAR (General Anti-Avoidance Rule) provisions.

The writer is Partner, Nangia Advisors. With inputs from Mansi Chopra, Manager.

Published on September 09, 2018
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