The Hindu Business Line : Budget 2006: Fine-tuning the tax regime

There is room, in the corporate and income-tax areas, for some simple and path-breaking initiatives aimed at improving the overall efficiency of the economic system. An increase in the tax-GDP ratio being inevitable, the mantra for personal and corporate taxation should be `simplify the structure, reward the compliant and punish the guilty,' says Bhanoji Rao.

THERE seems to be a general feeling that the forthcoming Budget will generate little or no excitement. Apart from (perhaps) one more modest movement towards further reductions in Customs and excise, nothing else seems even `dreamable', especially on the corporate and personal income-tax front. Yet, there is room for some simple and path-breaking initiatives aimed at improving the overall efficiency of our economic system.

As per the Common Minimum Programme, there is a commitment to eliminate the revenue deficit of the Central Government by 2009, without reducing or curtailing growth of investment and development outlays. This calls for raising the tax-to-GDP ratio "by undertaking major tax reforms that expand the base of taxpayers, increase tax compliance and make tax administration more efficient." The CMP also promises special schemes to unearth black money and assets.

The need to raise the tax-GDP ratio is clear from the standpoint of raising the present levels of overall efficiency within the global competitive context, without letting large numbers go unemployed and hungry. The role of the state is no longer one of directly producing goods and services, which the private sector can do at relatively lower cost and higher efficiency; instead, shocking as it might appear to some puritans, the state has to raise investments in education, health-care, public housing for the low and lower middle income groups (which alone will ensure sustained supply of drinking water and sanitation), irrigation and essential infrastructure.

If one were to simply go by the much-talked-about 6 per cent of GDP for education, and scale up government investments in all other sectors, total expenditure should go up, and not down, from the present.

The present state of the fiscal operations of the Central government, based on the data for 2004-05, is as follows: total expenditure of 15.5 per cent of GDP, revenue expenditure of 11.5 per cent and capital expenditure of 4 per cent. As fast as possible these should go up, respectively, say, to 20, 14 and 6.

Given the problems of ageing and the need to provide social security on a large scale, these percentages may have to go up. If we hope for eventual elimination of not only the revenue deficit, but even the overall fiscal deficit, an increase in the tax-GDP ratio from the present levels is inevitable (see Table).

The tax-GDP ratio should go up from the present level of a little over 10-14 per cent of GDP to match the targeted revenue expenditure, with relatively more revenue coming from personal and corporate income-tax contributions. Their present 4 per cent contribution must double as soon as possible, with a view to keeping the burden of indirect taxation at a constant level.

Earlier efforts to raise this number of personal income-tax payers have included insistence on the following categories of people to file returns: those in occupation of an immovable property exceeding a specified floor area, owners or lessees of motor vehicles, subscribers to telephones, those travelling or financing foreign travel, holders of credit cards and members of clubs charging Rs 25,000 or more. It is difficult to see if the results have been commensurate with the efforts. Many file returns simply because they have a phone or a credit card, but their contribution to the tax coffers is miniscule.

The total labour force of the country is close to half a billion and the urban labour force is around 100 million. Income-tax payers, however, are a little over 30 million only. What is needed is an increase, not only in the numbers of taxpayers, but also in the amount collected with specific targeting on the evaders.

As for widening the personal income-tax net in the context of a high-growth economy, the numbers of those filing must go up with least cost for those filing and the IT officers accessing the returns, based on two initiatives. First, there should be increased issuance of PAN cards to all those who are in the workforce, starting with the urban workforce. Second, for all those with PAN cards, routine electronic filing of returns should be compulsory.

The present system of having intermediaries for electronic filing should be done away with. The PAN should be used by every holder of PAN to log on to a special Web site (taxpayers.net.in, for instance), with a password given by the tax department and work interactively in easy steps to file the return. One can even go to the extent of devising bank account numbers linked to PAN. Tax payments should be via electronic debiting from a designated bank account with penalties for delay in payment.

Today's income-tax system is far simpler than those of the earlier decades. Yet, there is still room for further simplifications. For instance, except provident fund contributions and life and health insurance premiums, there should be no other exemptions. There should be an end to the fringe benefits tax; and free house and care, etc., should have standard monetary value attached to them and these should be part of income.

Instead of the tax-exempt income limit being Rs 1,00,000 in general, Rs 1,35,000 for women below 65 years and Rs 1,85,000 for all above 65, it is best that the general exemption be raised to Rs 2,00,000. As for the slabs and rates, the 10 per cent rate may be applied for the first quarter million, 20 per cent to the next and the 30 per cent taxable income above half a million.

A token 5 per cent of total tax amount due may be offered as a reward to those filing returns electronically plus paying via electronic bank transfer. Slowly, tax deduction by the employer should be done away with; it should be enough if the employer keys in electronically the PAN numbers and salaries paid to each employee, information that springs up when the taxpayer logs on to the taxpayer site. The same should apply eventually to all TDS.

It takes a lot more nerve to do business than being an employee or even a self-employed person. The corporate income-tax rate should be lowered to 25 per cent, again with zero exemptions, in general. International evidence shows that such a rate plus minimal exemptions should ensure higher revenue productivity.

Then, there is the vexatious problem of tax evasion. A lot of it arises in property transactions, where capital gains and rentals are understated. The best option is to have rates fixed for metros and other cities and indexed. While rental incomes at fixed rates should be part of income, it is most convenient if capital gains are taxed separately — say, at 20 per cent. Also, it is best to make property registration contingent on paying the capital gains tax computed on the basis of fixed and indexed rates.

The mantra for personal and corporate taxation should be `simplify the structure, reward the compliant and punish the guilty.' It is widely believed that there is considerable tax evasion in Customs and excise. Uniform rates across the board are the best bet, ushering in an end to exemptions and discretions.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@gmail.com)

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