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Thursday, Jun 13, 2002

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Opinion - Income Tax

I-T: Of non-filers and under-reporters

T. C. A. Rmanujam

IT MATTERS little to the Government of India whether the colour of the money is black or white as long as it flows into its coffers. That was the message when the New Economic Policy (NEP) was launched a decade ago. Tax rates were lowered, amnesty schemes repeatedly announced and every attempt made to downgrade the Income-Tax Department's role for the consequential generation and proliferation of unreported, unaccounted or underreported incomes and wealth.

The chickens have come home to roost. A decade on, the Government has woken up to the fact that taxpayers declaring incomes of above Rs 10 lakh are just 46,000. Of this, the salaried class accounts for 26,000.

There has been a constant outcry that the salaried class is being especially targetted, what with the tightening of law, rules and procedures concerning the assessment of salary income. The non-salaried taxpayers reporting incomes of up to Rs1 lakh is about 50,000.

So how has the I-T Department achieved a breakthrough in widening the tax base through the one-by-six scheme and expanded the payer base to 23 million? An audit of the revenue gains through this scheme is overdue.

The cash story

Analysing the causes for the large under-reporting of incomes by the non-salaried segment, the Finance Ministry appears to have expressed the view that a chunk of transactions is in cash and go unreported. The Central Board of Direct Taxes brought in rules making it obligatory for those buying cars, opening time deposit with banks or post-offices to quote the PAN (permanent account number) in all such transactions. Even hotel bills have not been spared.

Wherever they exceed Rs 25,000, the PAN has to be quoted. These rules have been in force for about four years now. The law also prohibits transactions other than through account payee cheques wherever the amount exceeds Rs 20,000. Yet, at regular intervals, we may come across a Central Minister found in possession of over Rs 3.5 crore; a Chief Minister found with deposits running into several lakhs of rupees and terrorist outfits possessing lakhs of rupees in cash. Should we legislate that money obtained through favours should also be made through account payee cheques?

The truth is that the rich are getting richer with the onset of the NEP. The American strategist and economist Kevin Philips has sketched the political history of the American rich in his latest book `Wealth and Democracy'. It does not require great insight into the working of democracies to realise how the wealthy use their money to buy influence and then employ the resulting influence to accumulate more money. According to the professor, Wealth and Democracy is enough to make any but the most privileged Americans deeply suspicious about the growing influence of the wealthy on their government.

He identifies three distinct US historical cycles in which the egalitarian policies of Moderate American Presidents were replaced conclusively by the `language of Wall Street, Darwinism and tax cut workshop'.

The result each time has been greater the concentration of wealth and power at the top, which in turn is used to buy economic policies to the liking of the rich, such as cuts in taxes on income, estates and gifts. The middle-class has to work longer for stagnating wages and the average household cash income remains flat for a decade and more. In this American scenario the richest one per cent get all the benefits.

Tax policy is increasingly skewed to suit the purposes of the millionaires and their incomes zoomed from an inflation adjusted $2,56,000 to more than $6,44,000.

Kevin Philip has expressed the hope that the present situation can be self-correcting with a new burst of "radicalism seeded by economic and political pessimism". He recommends higher taxes on inheritance and income.

This description of the American Rich can be applied to the Indian elite. Look back at the Budgets presented in the last ten years.

The grave concern was to please the industry and the stock market. But what is the stock market and to whom does it cater?

John M. Keynes observed in his General Theory: "When the capital development of a country becomes the by-product of the activities of a Casino, the job is likely to be ill done."

Was it not a subterfuge to drop estate duty and the gift tax promising to bring in more effective legislation and failing to live up to the promise?

Exemptions galore

It is not as if the tax administration is slack in going after the non-filers and the under-reporters. It has many successes to its credit.

For example, the unearthing of the TDS scandal that involved Japanese technicians and brought to light tax evasion of Rs 500 crore. Or consider the Mauritian tax fudge.

It was a low-level tax officer who initiated proceedings to catch funds round-tripping via Mauritius. The problem is that politicians have a vested interest in encumbering the tax code with exemptions that make nonsense of the tax rate of 30 per cent for individuals and 35 per cent for companies.

A recent order for the Second Appellate Authority in Mumbai grants over Rs 100 crore to Tata Steel by holding that the Jamshedpur township is itself a plant entitled to investment allowance and depreciation allowance at the rates applicable to factories engaged in manufacture.

It is only a matter of time before other townships also take advantage of this ruling. Imagine the situation if the Government were to do away with all the incentive provisions and simultaneously substantially lower the tax rate.

In an IMF staff paper on the shadow economy (Issues series No 30), Messrs Friedrich Sehmeider and Dominic Enste have shown that marginal tax rates have a greater bearing on the decisions people make than average tax rates.

At the present three-tier tax rates, there is a temptation to reduce incomes at the margin to the second tier rate. The removal of exemption and reduction of tax rates will definitely have a positive impact on the present widespread practice of under-reporting incomes at the higher level. The I-T Department is full of brilliant officers and has undergone thorough restructuring for two years now.

There are now 130 additional secretaries and thrice that number of joint secretaries. The Revenue Department can be expected to deliver only if there is no political interference. Mr Alvin Toffler talked of waves of development. The first wave that gave rise to rich agriculturists has been kept outside the tax code. Why?

The Third Wave, comprising service professionals, resort to under-reporting of incomes and contribute about 50 per cent of GDP.

This segment requires the I-T Department's attention, which also calls for a determined and independent approach. Perhaps, the expertise of professionals such as those from the National Institute of Public Finance and Policy can be sought.

Why not give the Revenue Department an independent status, untrammelled by interference from highly-placed politicians? Does anybody hear of the US Inland Revenue Service being interfered with?

The I-T Department cries out for such an independent status.

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