The Hindu Business Line : Budget: Making it less taxing

The Finance Minister, Mr P. Chidambaram, presented the dream Budget in 1997-98, when he cut tax rates that were till then sacrosanct, leaving an indelible imprint in fiscal annals. With Mr Chidambaram close to wrapping up the 2007-08 Budget, which will be presented to Parliament on February 28, media is agog about the fiscal proposals that can be expected, partly making educated guesses and partly speculating on inspired leaks.

Tax exemptions

The speculation also got some fuel from both the Prime Minister, Dr Manmohan Singh, and the Finance Minister talking about pruning the variety of tax exemptions and breaks.

These exemptions lower the effective tax rate for industry and business, but reduce revenues for funding capital expenditure on developmental programmes so dear to the Government.

The recent flare-up in the inflation rate, based on the Wholesale Price Index, may have tempered the zeal of the authorities to propose any significant hike in the service tax, which was increased to 12.5 per cent last year.

With excise collections growing at less than 7 per cent, no major changes in the structure of the levy may be planned, particularly when the manufacturing sector has been showing a dynamic resurgence after a decade or so.

The apex bank, in its third quarter review of the annual statement of Monetary Policy, on January 31, mentioned that the impact of inflation on the poor would be particularly harsh if the prices of the basic necessities of life increase. In the light of this, the Government, swearing by aam admi, can ill afford to tinker with the tax rates. On the contrary, it may even plump for selective cuts in the excise on a range of goods widely consumed.

There are rumours that a cut in the excise duty on diesel and petrol is on the cards. The Reserve Bank of India justifiably contends that high inflation not only operates like a tax on the poor but also undermines economic growth and stability in several ways.

Weighed down by inflation worries that could wreck his plans for sustaining the pervasive high economic growth, the Finance Minister is unlikely to go for major tax rate revisions that might handicap one or more productive segments of the economy.

Gaping holes

If known constraints are restricting the government from raising resources through fiscal tools, what would help the Budget-makers rake in the moolah? Here comes the issue of fine-tuning policies and instruments.

Is it not true that a country's moral standard weakens when laws are framed in such a way that honest people find it difficult to comply with them?

Leading accountants see gaping holes in certain provisions of the Income-Tax Act which do not stand up to logic. According to them, the Government, which is endeavouring to redraft the I-T Act to make it simpler, ought to do away with these aberrations. They feel that, "Artificial and deeming provisions should as far as possible be avoided, which itself will make the law simple." If discretion is the better part of valour, discretionary powers have become the worst part of venality as far as tax administrations go.

A look at some of the issues raised by the accountants. They feel that though the Chief Commissioners of Income Tax (CCIT) are vested with powers to reduce or waive interest and penalty, this power is rarely exercised in favour of the assessees as any relief would be construed as abetting the omissions.

The terms `voluntary', `before detection' and so on are mere jargon, which are not categorically defined in the Act, with the result that the mandarins in the Tax Department interpret them on their terms, often impacting the assessees.

Also, according to them, though there are directions to use with caution the provisions of Section 281B concerning attachments, this provision is being resorted to indiscriminately, affecting the assesses.

Another provision is that expenses are allowable only if tax is deducted at source. This is not possible at all times.

For instance, businesses done with transporters. Even a medium-level transporter may engage thousands of lorries in a year and to deduct tax at source for most of them would be a Herculean task.

Standard deduction

The Finance Act (2005) did away with the Standard Deduction under Section 16 of the I-T Act. Instead of expenditure on books, travelling for purpose of employment and other expenses incidental to employment, for which details would have to be scanned, the Standard Deduction was introduced. Now, it has been abolished for the salaried class on account of an increase in the general exemption limit and the substantial broadening of income slabs.

Accountants argue that the new benefits, if any, are available to all assessees with income under other heads too. Is it expedient to set aside such expenditure incurred by the salaried people and is it not a clear case of discrimination?

With inflation rearing its ugly head, Standard Deduction needs to be restored for the salaried class. There is an urgent need to overhaul the tax administration so that it is in tune with the times when people are encouraged to spend.

Looking forward

If the instruments with the tax authorities are blunt and hurt the taxpayers, it would only make the assessees conceal income or resort to other ways of avoiding/evading tax.

The honest and harassed taxpayers look to the Budget for a roadmap to bring in an element of trust and motivation in the larger taxpaying community so that they discharge their obligations without demur.

So, it is entirely up to Mr Chidambaram to present a dream Budget once again by simplifying procedures and spelling out the limits of discretionary powers that are being exercised arbitrarily to the dismay of the assessees.