Monthly Archive July 2017


When two men fought: To tax or not to tax!

Two men fought in the name of Income tax! One was adored; the other man was deported!

Sir James Wilson was committed for a wrong cause! He fought tooth and nail to bring in an unjust income taxation in India amidst popular opposition.

Governor of Madras Sir Charles Trevelyan, broke all protocols and went public like a people’s leader defying the Queen. It is said that he ‘instigated’ the “great Madras revolt” against the introduction of income tax in India. Quite unheard of in the colonial history! What a brave step by the representative of the colonial master!
He said: ” It is a desperate leap in the dark….The claim of deficit is not true…”. He argued that deficit could be met by reduced spending, even on defence. 

Lord Canning, who was earlier in agreement with Sir James Wilson, later got convinced with the argument of Trevelyan and said: ” Danger for danger, I would rather risk governing India with an army of only 40,000 Europeans than I would having to impose unpopular taxation.” Lord Elphinstone, Governor of Bombay also agreed with Trevelyan. 

Sir Charles Trevelyan was recalled immediately to London for opposing Income tax and was accused of ‘palpable and plain insubordination’. Sir Charles Wood had stated that ‘Sir Charles Trevelyan is an honest, zealous, upright and independent civil servant. He was a loss to India, but there would be danger if he were allowed to remain, after having adopted a course so subversive of all authority, so fearfully tending to endanger our rule, and so likely to provoke the people to insurrection against the central and responsible authority’.

Sir James Wilson won. He ensured that Income Tax bill became a law on July 18, 1860. The bill received the assent of Governor on 24th July 1860. He wrote jubilantly to his daughter in July 1860: ‘ ..for a bad job the best has been made of it, but the task is heavy and I fear a long one…’. Rightly, Simon Commission in 1927 ( about 67 years later) noted: ” …very definite limits to the extent to which an irresponsible government can force increased taxation on a poor country”.

India had an unjust, inequitable, biased and unpopular tax history since ancient India. It continued to be unjust during medieval and British India. Only in the post independent India, Income tax got legitimacy due to its fairness, horizontal and vertical equity and its transformation as an instrument of social welfare. (Read ‘Making People Pay (2010)’ by the author to view the references).

Present day civil servants also need to draw a few lessons from this. Sir Charles Trevelyan represents a civil services ethos that understands the pulse of the people, abound with administrative wisdom and rooted in fiscal prudence. In contrast, Sir James Wilson represents a bureaucracy that advocates impractical, irrational and illogical policies to project their superior knowledge and to please the uninformed masters. Fortunately, we have a strong democracy that is not authoritarian and exploitative like the colonial government and therefore committed leaders and taxmen of Trevelyan’s genre are not snubbed and deported easily.

It was on April 1st, 1962 that Income tax Act – truly an act that is Indian in content and character – was born. Therefore, it would be more appropriate to celebrate April 1st ( Nothing to do with April fool’s Day!) as Income Tax Day rather than July 24 on which an unjust, harassing, inequitable, despotic and discriminatory income tax law was thrusted upon. Nevertheless, a very laudable initiative to declare a day for this – it doesn’t really matter which day is that. Let Income tax Day be an occasion for taxmen to dedicate themselves to the nation to administer the tax laws with fairness, transparency and empathy than to go on an education and PR spree about the utility of paying taxes. Yes, Indians understand the rationale of taxation and they believe in the benefits of the culture of tax compliance. What they don’t understand is the avoidable procedural complexity administered by an unfair and uninformed taxman! Therefore, the Income tax Day should be ideally marked by more events that make taxmen introspect than any artistic or cosmetic outreaches. However, PR actions that are substantive and beneficial with long term implications to taxpayers can add value.

(c) Sibichen K Mathew. Views are personal and purely academic in nature.

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You might trust your auditor. Do you trust theirs?

    1. Indian Prime Minister Mr. Narendra Modi has recently described Chartered Accountants as doctors for the economic health and well-being of society. He also compared them to the saints and sages of the economic world. On the occasion of the Chartered Accountant’s Day he told them that the entire country reposes faith in the certification of Chartered Accountants, and said that this faith and trust should never be broken. However he called upon the Chartered Accountants to ‘introspect and weed out corrupt practices and persons from their fraternity’.
  • How many of you evaluate the past performance and future prospects of a company before investing in its shares? We go by the popular perception, public profile of that company, or the ‘hype’ created by the company itself! The media, the consultants, the specialists and the advisors suggest the best deals to the potential investors. All of them give their views on the basis of the financial statements and audit reports of the company. That means, investors trust the audit reports. To put it simply, ‘people trust the Chartered Accountants’!

    Contracts are entered, money is lent, job offers are accepted, tax incentives are given, and above all ‘social recognition’ is bestowed on many corporates on the basis of a beautiful (well-dressed) balance sheet amply certified by auditors.

    Yes, we – the government, the investors, the lenders, the purchasers, the sellers, the service providers, the taxmen, the employees, the public – means, the entire society, repose faith in the auditors! And the auditors are supposed to vouch, examine, evaluate and certify the correctness or otherwise of the transactions of the company and its orientation.

    Yet, we hear well-established companies bursting like bubbles, share prices reaching rock bottom, promoters fleeing the scene, top management going behind the bars, and all stake holders watching everything helplessly!

    What was wrong?

    Audit, all over the world, is a powerful instrument to ensure accountability and financial regularity in all types of institutions and organizations. Though millions of investors rely on corporate audits, the recent corporate scandals all over the world have raised serious questions about the efficiency and effectiveness of corporate audit regulations and enforcement. The audit report is a powerful indicator of a company’s financial stability, accounting consistency and reliability. However, everything depends on how efficiently the audit was done and how clearly the transactions are reported in the audit report.

    The Lehman Bankruptcy Examiner’s Report has come down heavily on the failure of Ernst & Young in preventing one of the biggest failures in the Wall Street that triggered global recession. Audit and accounting failures were also evident in the cases of BAE Systems , Olympus , Enron , World Com , Lucent Technologies , Sun Beam Corporation , Waste Management , Boston Chicken etc. India has also witnessed a series of financial scams in the last decade especially during the liberalization period, most of which are rooted at accounting frauds. However, the responsibility of the auditors in these scams and their role in frauds are never viewed seriously. Reserve Bank of India has a long list of companies who have been guilty of unethical accounting practices and diverted public funds. A number of companies vanished with crores of rupees immediately after the public issue. Financial statements of several companies became unreliable and depicted wrong state of affairs. Satyam scam is the best example.

    The Problem areas

    The corporate scams and scandals happened in the world in the last few years are clear indications of the collusion between auditors and management in accounting frauds. They have happened either through active suggestions and consultancy to commit frauds or through deliberate omissions in the job. Inefficiency and technical incompetence of the auditors have resulted in some of the corporate debacles. It is foolish if one refuses to learn any lesson from the above scandals, thinking that these are just aberrations and will not recur.

    Dependence on the clients

    In many cases it is seen that the audit firm is unduly dependent on the client financially. It may be due to the fact that the audit firm provides bulk of its resources for that client or it receives substantial amount of its earnings from that particular client. Thus it is a question of survival for the firm. It results in subjectivity in the performance and reporting of the auditor. In spite of strict codes of conduct, many auditors enter into financial transactions in the names of relatives with the client or the client’s associated concerns. There are also beneficial interest in trusts of the clients, and in shares and investments in associated concerns and also employment of close relatives in connected concerns and re-employment by the auditors in the clients’ concerns. Most of the audit firms involve in the non-audit work of their clients and they receive substantial portion of their earnings from such non-audit activities.

    Responses of the regulators and intra-disciplinary bodies

    Sarbanes-Oxley (SOX) Act , is the US authorities’ response to political outrage in the wake of Enron, WorldCom, and other equally shocking failures of law, standards, governance and audit. SOX Act is considered as the legislation, which brought most sweeping changes to securities law, corporate governance, and the regulation of auditors since the Securities Exchange Act of 1934 . The SOX Act has international implications since the auditors of overseas subsidiaries or associates of US listed companies are obliged to sign up to it if they wish to retain the work. SOX Act laid down an array of strictures on company directors, especially CEOs and CFOs. Failure to comply could mean prison terms of upto 25 years. The creation of the self regulatory board of Public Companies Accounting Oversight Board (PCAOB) by the US Congress through the Sarbanes-Oxley Act 2002, was meant to give powers to the Board over the external auditors in order to guide them in auditing the public led companies. Though there are enough laws, the institutional mechanisms in India and many countries are marred by weak enforcement.

    Need for a global policy

    What is imperative today is the establishment of an International Quality Assurance Body that formulates universalistic principles and guidelines for all accounting, auditing and consulting firms all over the world. The body should suggest an appropriate mechanism that ensures quality, reliability and objectivity among audit firms. It is also necessary to have concerted action to prohibit direct or indirect monopoly in the area of auditing and consulting by a few firms. Proper auditor rotation, disciplinary mechanism, and an environment that ensures auditor independence can bring back public trust on the auditors. Establishment of an Independent Audit Regulatory Authority is necessary in countries.

    © Sibichen K Mathew
    Views are personal

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