The Hindu Business Line : The FM may not scrap the I-T Act, as yet

MOST chartered accountants win their daily bread from tax practice. And a fear that lurks in their minds is that one fine morning there may not be an Income-Tax Act at all. Such a thought, though ostensibly outrageous and hypothetical, is a possibility if the Government were able to perfect its art of collecting taxes from transactions, which are inevitable and numerous, rather than impose a levy on incomes, which are only too prone to massaging.

If the past is any indication, the Finance Minister is more likely to propose changes to the existing Act, so it would be worthwhile for CAs to explore where such tinkering can be expected. Therefore, tax provisions that have been reasonably successful may be fine-tuned to remove administrative bottlenecks, while sections that are irrelevant in the current context may meet with the FM's axe.

Unpopular ideas: Take for instance agricultural income. It has been a holy cow that successive Budgets have tried to woo. Already, the Centre is collecting tax indirectly on agricultural income by aggregating agricultural income for tax rate purposes.

Now, as ever, there are audible discussions on taxing agricultural income earned by taxpayers and exempting only those whose sole income is from agriculture. It may need some boldness on the part of the FM to tax agricultural income, or alternatively, hike the tax rate in respect of other incomes in the case of assessees having agricultural income. The question is, will he bite the sickle?

Educational institutions are another `handle with care' group. Instead of exempting them totally, how about a 10 per cent tax on entities that have income above a certain limit? On similar lines, charitable trusts may also be brought into the tax net with concessional tax rate based on the cash income of the trust, instead of accrual basis or income based on complex computation methodology. Too uncharitable thoughts, are these?

Registered political parties deriving income from house property or income from other sources or capital gains, or any income by way of voluntary contribution, are exempt from tax provided they maintain books of account, and the accounts are audited. One wonders if there is any reason to exempt the voluntary contributions received by political parties from tax. Even at the cost of drawing loud protests in the House, the FM may have to remind the members that tax should begin with politics just as charity begins at home. Will Section 13A exempting political parties' incomes get struck off?

Redundancies: There are non-taxable entities such as scientific research associations dealt with in Section 10(21), news agencies set up in India (Section 10(22B)), and associations meant for control, supervision, regulation or encouragement of the profession of law, medicine, accountancy and engineering dealt with in Section 10(23A), and trust/society for the development of khadi or village industries (Section 10(23B)).

While these are provisions that have evolved over the years, there is a case for simplification by deleting them, and taking recourse to Section 11. The phrase `non-profit institutions' may be defined in Section 2 to cover the above entities; and a reference to this in Section 11 should serve the purpose.

To set the tax house in order, the tax regime governing house property income needs a re-look. Section 23, on determining `annual value', merits untangling, because this lies at the core of house property taxation. Instead of a notional value, how about taxing the actual rent by getting confirmation of the rent from the tenant? And, where the assessee occupies more than one house for self-occupation, the Department may verify the correctness of the claim without providing for deemed taxation of house properties excluding one house. Taxation of income from property on receipt basis may pave the way for the removal of Sections 25, 25A, 25AA and 25BB.

Liberal measures: Let us take a liberal view of undertakings in free trade zones and those that are 100 per cent export-oriented units, and think of extending complete tax exemption up to the assessment year 2009-10 without any conditions. This would enable the undertakings to have competitive pricing policy in the emerging global market. Similarly, entities eligible for Section 10 BA deduction are worthy of blanket exemption.

Corporate assessees play a useful role in the economy, both in capital formation and employment generation. On dividends distributed, domestic companies pay tax at 12.5 per cent. In the light of this, Section 115JB, the `artificial' tax provision imposing 7.5 per cent tax on book profits looks like a worthy candidate for omission. Something that can win accolades from company circles.

Mr P. Chidambaram can earn praise from the salaried class too. This is how: By simplifying computation of income from salary. In terms of cumbersomeness, salary tax calculation may rank next only to transfer pricing. An area that complicates salary number crunching is perquisite valuation. Why not tax only cash perquisite? For, non-monetary perquisites last only as long as employment continues. Therefore, these deserve to be treated as business expenditure in the hands of employer and, at the same time, tax-free in the hands of the employees.

The business of taxing business income

ALAN Greenspan said, "It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person's ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making." One can't disagree on that; but to require businessmen to stretch too much their competency to handle ambiguities and complexities of tax law is an avoidable hassle.

Cut-off time: Take Section 35D of the Income-tax Act as an example. It is on amortisation of certain preliminary expenses. The section reads like a chapter. Lawmakers can simplify compliance by providing deduction totally in the year of commencement of business. Similarly, other sections such as 35DD on amortisation of expenditure in case of amalgamation or demerger, and 35DDA on amortisation of VRS expenditure, may be amended to provide deduction in the year of expenditure.

Political divide: Section 37(2B) states that any expenditure incurred by way of advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party is not eligible for deduction.

Quite anomalously, cash donations given by assessees are eligible for deduction under Sections 80 GGB and 80 GGC from the assessment year 2004-05, where any donation is made on or after September 11, 2003. To be fair, ads shouldn't be discriminated against.

Double jeopardy: A draconian provision that crept into tax law after the last year's changes is Section 40(a)(i), along with (ia). Any expenditure for which tax is not deducted at source in accordance with Chapter XVII-B is not deductible when computing business income; and the assessee can claim deduction of such expenditure only in the year in which the tax is deducted and remitted.

This punishment is without prejudice to penal provisions contained in Section 271C and interest under Section 201(1A). Thus, for a single lapse, that is, non-deduction of tax at source, the assessee is not eligible for deduction of such expenditure and also is liable for penal interest and penalty.

Cash unchanged: Cash is what Section 40A(3) frowns upon. Accordingly, 20 per cent of the expenditure made is disallowed where it is incurred otherwise than by way of crossed cheque or draft in excess of Rs 20,000, a limit that has stayed put for the last about eight years. Is it not time to increase this to Rs 50,000?

Due for hike: Section 44 AB provides for tax audit where the aggregate turnover exceeds Rs 40 lakh in the case of business and Rs 10 lakh in the case of assessees having income from profession. You'd be surprised to know that this limit was prescribed more than two decades ago. To be pragmatic, ceilings may be raised to Rs 60 lakh and Rs 15 lakh, for business and profession, respectively.

Appropriate revisions are also necessary to limits specified in Section 44AA also. CAs may militate against this because the number of tax audit assignments would reduce if there were hikes as suggested.

Contractors: Section 44AD brings within its ambit only civil construction contractors. It will be advisable to extend the coverage to other contractors, such as electrical and engineering, so that they too benefit from the presumptive income provisions. Likewise,

Section 44AE on computing profits of business of plying, hiring or leasing goods carriages may be extended to passenger carriages too to enable easier tax compliance without maintenance of books of account.

And Section 44AF currently applicable to profit computation for retail business may be made applicable to all assessees, including manufacturers, where the turnover is below Rs 60 lakh.

If a differential were wanted, presumptive income rates may be enhanced in the case of manufacturers and decreased in the case of wholesale traders.

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