The Hindu Business Line : Broad-base the slabs

The fact of inflation eroding incomes cannot be ignored. The fixed income groups are pitch forked into the higher tax slab because of what is known as bracket creep. This is especially true of those in the 10 per cent tax slab.

In the 2004 Budget presented in July, the Finance Minister pushed up the exemption limit to Rs 1,00,000, not by straightaway raising the limit but by providing a tax rebate with marginal relief.

Realising that this was an unsatisfactory way of dealing with a problem facing taxpayers at the lowest level, the Finance Minister promised to have a fresh look at the exemption limit and the slabs in the 2005 Budget.

It may be argued that the tax rates are moderate and comparable with international levels. The comparison ends with the rates but not at the entry level for applying the rates. The maximum rate of 30 per cent is applied on incomes above Rs 1.5 lakh. Pakistan applies the maximum rate of 35 per cent on incomes above $15,000 and Brazil, 27 per cent on incomes above $7,300. There is much that goes in favour of giving up the 10 per cent slab and will tally with the attempted relief to those with taxable income up to Rs 1,00,000.

The following Kelkar Task Force recommendations will be appropriate this year:

"In 1973-74, the tax rates of 10 per cent and 20 per cent were applicable for incomes up to Rs 10,000 and Rs 20,000 respectively. The corresponding inflation adjusted income levels are Rs 1,00,000 and Rs 2,00,000 in 2001-02.

"Thus, the existing corresponding income levels of Rs 60,000 and Rs 1,50,000 are substantially lower than the inflation indexed levels, thereby resulting in an increase in the real tax liability. Historically, while the top marginal rates of tax have been reduced, the tax liability at the middle has indeed increased.

"This, not surprisingly though, has given rise to the problem of `the missing middle'. If the full effect of lower tax rates has to be realised, it is not only necessary to have an optimal enforcement strategy but also ensure that the benefits of a tax cut apply to all class of tax payers — rather than be restricted to a handful of taxpayers at the top end. This is possibly achieved by broad basing the tax slabs and we recommend accordingly."

The Task Force accordingly recommended a nil tax for incomes below Rs 1,00,000, a rate of 20 per cent for those in the Rs 1,00,000-4,00,000 slab and 30 per cent for those above Rs 4 lakh.

It brushed aside apprehension at the possibility of a large number of taxpayers dropping out of the tax net, pointing out that the package of administrative and policy reforms and empirical evidence should indicate that such fears are misplaced.

It showed with facts and figures that raising the exemption limit never resulted in any fall in the number of taxpayers.

The broad basing of the tax slabs will encourage professionals and businessmen to disclose higher incomes.

According to the Task force, "If compliance is to be fostered and nurtured and economic incentives sustained, it is necessary to review the various exemptions, deductions and rebates."

MAT and corporate tax rates

Chambers of Commerce had made out a strong case for the abolition of minimum alternate tax (MAT). Unfortunately for them, Fortune 500 company and public sector giant, Indian Oil Corporation, has chosen to become a zero-tax company. The subsidy on kerosene and LPG has hit revenues, and IOC has declared that there will be no taxable profits in the normal sense and that it may pay only book profit tax.

The Government loses both by way of taxes and dividends. MAT will, therefore, here to stay. Probably, it may be more stringent, with the exemptions modified or withdrawn.

Corporate tax rates require revision on two counts.

First, they should be integrated with personal tax rates so that the form of business organisation does not matter in fiscal laws.

Second, the tax on foreign companies may have to be reduced to attract foreign direct investment and thwart foreign tax competition.

The case is strengthened further by recent decisions holding that foreign institutional investors are not liable either for capital gains tax or business profits tax in respect of their stock market operations.

To attract FDI, the Government will have to confer benefits on foreign companies.

(The author is a former Chief Commissioner of Income-Tax.)

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