The Hindu Business Line : Cast it wide

WITH the Government's finances not in comfort zone, the Budget for 2002-03 has to be bold and one that triggers growth. With not too many options on the direct taxes front, the measures to garner revenues will no doubt be hard. But the question is whether the Finance Minister, Mr Yashwant Sinha, can actually implement the measures ignoring political compulsions.

The easy way out would be to hike tax rates and adjust the income brackets. But this would be counter-productive, as the regime of reasonable taxes built over the years would be destroyed and many taxpayers may understate or totally avoid reporting their incomes. A course that no Finance Minister would prefer.

An effective way to raise revenues would, therefore, be to widen the tax base and tax those sources of revenue which were hitherto outside the tax net. In this context, attention gets diverted to the agricultural sector, which encompasses nearly 70 per cent of the population. And though the sector receives substantial benefits from the Government in the form of subsidies and loans at concessional rates, it contributes virtually nothing to the tax kitty. In this sector, a large number of persons operate on a commercial basis, on a large scale and live in luxury. They neither pay income nor wealth taxes. There is no reason why such rural rich should not pay taxes. No constitutional amendment is needed to make such persons taxpayers — only the definition of "agricultural income" in Section 2(1A) of the Income-Tax Act needs to be amended for which a Bill can be moved. The Supreme Court has already approved the levy of wealth tax on agricultural income. This would, besides augmenting revenue, bring equity to the tax system.

At present, the I-T Act is replete with incentive and exemption provisions, which bring down substantially the effective tax rates and, thereby, forcing the Government to introduce measures such as MAT. A thorough review of such benefits needs to be made to cut down these to a minimum. The Shome panel, in its October 2001 report, has suggested the removal of many such provisions. Only benefits which provide much-needed funds to the Government — for instance, those concerning savings, creating avenues for future earnings such as the development of infrastructure that require huge funds, or supplementing the Government's social objectives — should be retained. Where assistance is considered inevitable from the Government's side, it can be given in cash (rather than by way of foregoing of tax revenue) in accordance with the philosophy of transparent administration.

The other measures that could be considered for increasing revenue are:

Shifting the emphasis of voluntary compliance from low-tax segments to high- income groups where evasion is high and where higher revenues can be garnered with the same efforts.

Strengthening survey operations and using search provisions with deterrence, especially where evasion is high.

At present, survey as a potential tool for identification of new taxpayers stands considerably diluted because of the overpowering influence of taxpayer/trade associations. Efforts to lessen the influence of such groups that come in the way of implementing the I-T provisions are needed.

The coverage of tax deduction at source needs to be extended further with proper planning. The purposes of the TDS system are that it: a) enables the Government identify the income earners, most of whom would not have otherwise declared their income; and b) compels those whose income from which tax has been deducted at source to file their returns and, in the process, disclose other incomes too. Such persons, by this process, become regular assessees and, thus, add to the tax base.

Newspaper reports reveal that a number of companies do not file their returns. Enquiries in this regard, probably with the assistance of the Registrar of Companies, need to be made to bring such companies into the tax net. Being in the organised sector, it should not be difficult to accomplish this task quickly.

Nuclear families should be made units of taxation; this would check tax avoidance and simplify the tax system.

Quoting PAN should be made mandatory for those purchasing passenger cars/trucks/buses or other consumer durables worth more than Rs 50,000.

Complete exemption of dividends from tax is not only inequitable but also leads to revenue loss. Hence, the earlier system of taxing dividends needs to be reintroduced with the following changes: a) exempt dividend income for persons whose incomes (including dividend income) fall in the 20 per cent tax bracket; b) fully tax the dividend income of persons whose incomes (including dividend income) fall outside the 20 per cent tax bracket; c) abolish the current dividend tax regime.

The Wealth Tax Act has become farcical because of the liberal definition of the term `asset' as given in Section 2(ea). It needs to be reviewed not only to enhance review but also to fulfil the objective enshrined in the Directive Principles of State Policy, of preventing concentration of economic power.

Gift tax should be reintroduced to check diversions of income and wealth. Taxes on gifts and death duties are levied in a number of countries in one form or the other; and nowhere are these levies regarded as purely fiscal measures, the yield from them being only a very small percentage of the total tax revenue. Despite their poor yield and elasticity, very few countries have thought it fit to do away with taxes on gifts, bequests and inheritance altogether. Bringing it back would boost tax revenues substantially.

Of late, the focus has been on roping in small taxpayers. There is no point in flooding the Department with the returns of small taxpayers, where the tax payable is usually nil or not enough even to compensate the expenditure incurred in processing such returns. The effort should be to net bigger taxpayers.

Thus, to increase tax revenues, widening the tax base, strengthening the sources of information gathering and strictly enforcing the tax laws are a must.

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