The Hindu Business Line : It is always a noble idea to simplify tax laws

The existence of many exemption provisions by itself should not be a cause for complexity for the taxpayer or revenue leakage. MR SUDHIR KAPADIA, HEAD OF TAX PRACTICE OF BSR & CO., MUMBAI.

On January 8, the Prime Minister, Dr Manmohan Singh, while addressing the annual general meeting of FICCI (Federation of Indian Chambers of Commerce and Industry), stressed that our tax regime should be liberal, but equitable. He said, "We will now move towards a common GST (Goods and Services Tax) and better harmonisation of VAT (Value-Added Tax) rates as well. In the long run, our tax regime should not have too many exemptions which make tax administration an unnecessarily complex exercise vulnerable to misuse." To decode the cryptic message of the PM, Business Line contacted Mr Sudhir Kapadia, Head of Tax Practice of BSR & Co., Mumbai. Here are his answers to a few questions.

Tax sops and benefits come in different forms, such as exemptions, deductions and so on. Do you think the Prime Minister is perhaps referring to all of these?

Yes, the Prime Minister is referring to all exemptions and deductions, that is, all incentives available under the Income-Tax Act. The Kelkar Committee had recommended (in two reports) reconsidering the exemption regime.

However, it also gave various other suggestions that offset the removal of various exemptions. It was recommended that all the suggestions be accepted in toto.

While moving the Finance Bill 2005, the Finance Minister introduced the new Income-tax Amendment Act, a simplified version which may not have too many exemptions/deductions.

Do we have `too many exemptions' in direct and indirect taxes? Are some of them indispensable?

Some of the exemptions are indispensable owing to various reasons. For example, social obligations (Section 80C), providing incentives to a specific industry (Sections 10A, 80-IA/IB), encouraging investment in a particular part of the country (North-East, for instance), etc. The intention behind introduction of incentives need not always be revenue collection. It could be encouragement of a particular industry or earning valuable foreign exchange for the country.

As regards indirect taxes, we do have `too many exemptions'. Yes, some of these can be removed. For example, sector/product-specific exemptions which could lead to disputes of classification, which break the VAT chain, or are likely to create hurdles in the implementation of GST.

However, some exemptions are indispensable as they are given for genuine reasons, such as avoiding double taxation or giving a boost to growth of some products, sectors and geographical areas.

If information technology is leveraged well, should tax administration be a matter of worry?

The intention behind the introduction of any new technology is always good, but it should be backed by adequate response/adaptability. A recent stir by the tax department against automation and computerisation shows that new technology cannot be successfully implemented unless there is staff support.

On the other hand, adequate time should be given to taxpayers before introducing new-technology-driven changes — for example, e-returns for corporates could have been optional in the first year.

Is misuse of exemptions a cause for concern?

Yes, it is. Examples of such misuse include:

Those relating to agriculture income.

Bogus exporters claiming deduction under Section 80HHC, etc.

Bogus units set up just to get incentives such as under Section 10A/10B.

On the indirect taxes front, some manufacturing units relocate mainly to get exemptions based on geographic location.

How do you expect the Budget to handle the problem addressed by the Prime Minister?

Recent trends indicate that the Budget has got more to do with presenting the economic health of the country and policy decision-making. The amendments to the law can be done through amending Acts that are not connected with the annual Finance Act. The Government is already working on the draft of a new Income-Tax Act, where a number of exemptions/deductions are proposed to be done away with. The Budget may be a pointer in that direction. Also, the introduction of the EET (exempt exempt tax) scheme, which is due as per the policy statement issued by the Finance Minister, should also help in doing away with exemptions.

As far as indirect taxes are concerned, one could see the classifications streamlined and the roadmap to a simplified customs and excise regime laid out.

Are there best practices that we can borrow from other countries, in the realm of tax breaks?

India has already emulated the Chinese model of setting up SEZs (Special Economic Zones). EET, as prevalent in many other countries, is one of the best practices we have adopted. FBT, again, is a tax practice borrowed from abroad.

Tax breaks should be linked to areas where the Government is looking to channel funds for growth and development. Investment in infrastructure could be one of the areas that the Government could look at when providing tax breaks. Unfortunately the exemption under Section 10(23G) of the I-T Act, which did provide tax breaks to an investor investing in infrastructure companies, was withdrawn last year. A case could certainly be made out for its reintroduction.

Can exemptions coexist with a simplified tax law?

It is always a noble idea to simplify tax laws and make these easy for the layman to understand. However, the existence of many exemption provisions by itself should not be a cause for complexity for the taxpayer or revenue leakage.

For example, the tax law in the US is one of the most comprehensive and complex, and has its share of exemptions and incentives. One, however, does not hear too many US taxpayers complaining. This is because the language is unambiguous and misuse or breach of law is penalised severely and fairly.

If the law is administered fairly and strictly, the objectives of exemptions can be achieved and they can remain on the statute book.

D. Murali

More Stories on : Taxation | Interview | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Palm oil challenge

The Second Green Revolution — Towards a different kind of green revolution

Honest opinion necessary for write-off

Streamline the corporate tax structure

It is always a noble idea to simplify tax laws

Principal-interest dichotomy

Poor storage

Farm land acquisition