The Hindu Business Line : Inputs for an annual ritual

WITH the Budget season to start shortly, the Finance Ministry would be flooded with requests, seeking mostly direct tax concessions and other benefits for the various sectors. But suggestions to improve the tax system hardly come by.

Tinkering with the

Finance Acts

The tendency to legislate on a large scale through the Finance Act, especially prevalent during Mr Yashwant Sinha's tenure as Finance Minister, should be avoided. Mr Jaswant Singh, too, has shown similar enthusiasm, proposing 96 clauses on direct taxes in the Finance Bill, 2003, which were further increased by 7-8 sections at the time of passing the Finance Bill.

In the six previous Finance Acts (see Table 1), through long-winding language, 600 clauses were added. Obviously, the Finance Acts are not meant for making such wholesale changes and there should be no lengthy legislation concerning tax measures at the time of Budget presentations. Only urgent measures should be introduced through Finance Bills/Acts.

Major changes, such as those relating to block assessment, restructuring of the corporate sector, transfer pricing, and so on, should be introduced only through Amendment Bills, which should be well-debated and discussed before becoming law. By this, the draftsmen also get enough time to frame laws which can stand the tests of both time and judicial review. Amendment Acts should carry out only recommendations made by expert bodies such as the Kelkar Committee.

Eliminate infructuous work

The C&AG report for the year ending March 31, 2002 (Report No. 12) exposes the weaknesses of the assessment policies pursued by the I-T Department (Tables 2 and 3).

The report further talks of the utter failure of the assessment machinery in handling cases even in the organised sectors.

Hence, in the 2004 Budget, stress must be given to introducing measures that would i) effectively tap bigger taxpayers; ii) eliminate or rationalise the one-by-six scheme, which is mainly generating infructuous work for the Department and inflating the number of taxpayers without actually bringing any significant revenue; and iii) tackle tax evasion.

Revenue-earning measures

The basic philosophy that should guide a Finance Minister in Budget making is revenue maximisation.

The most effective way to raise revenue is to enhance the tax base and tap those revenue sources which have hitherto managed to remain outside the tax net. The agricultural sector is a case in point. While it receives substantial benefits from the Government in the form of subsidies and loans at concessional rates, it does not contribute anything to the tax kitty. There are many big farmers who neither pay income-tax nor wealth tax. All prosperous agriculturists need to be brought into the tax net.

The Wealth Tax Act needs to be revamped so as to include the concept of ability to pay.

The scheme of tax deduction at source may be further extended to new sources to increase revenue and rope in new taxpayers. One way could be to extend its coverage (as in Sections 194C and 206C), that is, base it on gross receipts rather than on income.

If this suggestion is accepted, then rationalisation in the TDS rates can be brought in by prescribing only one or two rates for different kinds of payments rather than multifarious ones, which, at present range from 1 per cent to 20 per cent.

The entry point tax rate of 20 per cent is a disincentive for many taxpayers who wish to enter the tax net. The current three-tier rates with exemption limit of Rs 50,000 should continue with the following changes:

Rs 50,000 slab — nil; Rs 50,000-99,999 — 10 per cent; Rs 1,00,000-2,49,999 — 20 per cent; above Rs 2,50,000 — 30 per cent.

The increase in number of taxpayers would make up for any revenue loss consequent to adjustment in slabs.

Other suggestions

The progressive factor in tax laws enjoins taxation on the principle of ability to pay, which is measured by income or wealth which one possesses. Going by this principle, estate duty (in a much more simple form) or inheritance tax and gift tax need to be brought back. These enactments need to be viewed not from the angle of revenue but as policing measures to ensure better compliance of other laws, such as income-tax and wealth tax.

While introducing a new tax measure or deleting an existing one, the revenue impact of the decisions taken should be mentioned in the Explanatory Memorandum.

The Budget should introduce some realistic measures to check tax evasion/avoidance.

No amnesty of any kind for tax evaders should be introduced.

The Budget should initiate measures to tax income from e-commerce effectively and for amendment of tax treaties to check loss of revenue consequent to cyber-trading, and so on.

Withdrawal of the existing exemptions and concessions on a phased basis.

Make announcement for appointment of a high-powered committee to simplify and rationalise the tax laws.

Some major schemes need be announced to tone up and invigorate the tax administration.

The opposition to tax measures comes mainly from vested interests, which increased following the economic policies of the past. This has to be overcome for any tax reform to be meaningful. And for this, emphasis must be given to strictly enforcing the tax laws and punishing the delinquent taxpayers.

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