The Hindu Business Line : Budget: Flying and sitting ducks

Budget means taxes. Every one looks at the Finance Minister to see if he escapes or falls into the net. But it is inherent to the system that some willy-nilly pay taxes — the salaried class — while others get away. The challenge is to turn more of the latter into former, says S. Murlidharan, making some suggestions in that direction ahead of Budget 2005-06.

SUCCESSIVE Finance Ministers have bemoaned the fact that the size of the tax-paying population in this country is abysmally small. And almost each one has vowed to correct the skew that has willy-nilly existed in favour of indirect taxes.

The noble sentiments, however, have not been backed by any concrete steps to correct these distortions. The anti-evasion measures initiated from time to time are either half-baked or half-hearted. Quite often both. The salaried class and the corporate sector continue to bear the brunt even as the businessman thumbs his nose at the taxman smugly thanks to a permissive regime that obtains for him.

The Finance Minister is under increasing pressure from the Left to squeeze more out of the corporate sector. Removal or phasing out of tax-holidays for various priority sector industries looks imminent. He may however not make any hasty move on doing the same with tax breaks on locational considerations both in the interest of developing the backward areas as well as to remain on the right side of friendly parties propping up the government.

Coming down on the corporate sector is the easiest of the options. In any case if this is done, the invidious MAT (Minimum Alternative Tax) targeting the corporate sector alone, should also go. One is however not sure whether this, desirable as it is, will happen. Fiscal considerations may get the better of logic and commonsense.

There is the other category of sitting ducks — the pampered ones. The Finance Minister should, in fact, target them both in the interest of equity and revenue considerations.

There is no reason why the share market should be indulged so egregiously Last year, the Finance Minister went overboard and abolished the tax on long-term capital gains from the bourses besides lowering the tax on the short-term variety from the same source to 10 per cent flat. To be sure, he did bring in the Securities Transactions Tax (STT) simultaneously. But the point is the STT should have been ushered in, in addition to and not in substitution of the existing taxes. After all there is a sales tax on goods, and service tax.

These are in addition to the income tax. Against this backdrop, there should have been no hesitation in giving the same treatment to transactions in the bourses. Curiously, this did not dawn on the Left. The revenue that can possibly be mobilized from the STT may be considerable inasmuch as like the distribution tax it is difficult to evade but this was not reason enough to shower an entirely unmerited bonanza on the investors.

If this was done in order to give a leg up to the share market, it was entirely misplaced, as people do not throng the bourses enamoured of tax sops. The distribution tax, which incidentally is the incumbent Finance Minister's baby, has not addressed the festering problem of double taxation of dividend what with cash dividend being subjected to a 12.5 per cent tax at the company's end; like the STT it has only made life a lot easier for the tax administration which otherwise would have had to keep tab on lakhs of investors.

Equity demands that dividend like every other source of income should be taxed in the hands of its recipient. Conferring total tax exemption to dividend in the hands of shareholders ironically pampers those who ought to pay more and not less — the entrenched section of the society. We must, therefore, revert to the earlier regime of taxing dividend in the hands of shareholders.

The problem of double taxation of dividend should be addressed by the system of imputation, which consists in giving credit to the shareholders in respect of the corporate tax paid by the company to the extent it is attributable to the profit that has been distributed as dividend. This would admittedly make the tax law that much more complex but then it is better to have a complex law than an inequitable one.

At the individual level, as eloquently argued by the Kelkar Committee, the exemptions granted to long-term capital gains subject to the rollover condition should be abolished forthwith. The specious argument in favour of these concessions is that these gains are illusory thanks to inflation. But then, in the face of the cost-inflation indexing regime that obtains for long-term capital gains, there is absolutely no need to continue with these exemptions. If it is granted that income of all hues must be taxed, then there is no place for these exemptions.

Economists rarely agree with one another. As the jaded joke goes, they agree if at all to disagree. The one area they are almost unanimous upon is the efficacy of TDS (Tax Deducted at Source). Indeed, TDS has been found the world over to be the most effective bulwark against tax evasion. The Indian experience too vindicates this. The salaried class, for example, is the best tax complier not because it is more honest but there is absolutely no scope for it to avoid tax. The employer doubling in practically as the income-tax officer puts paid to any such ambitions.

There is no reason why the TDS dragnet should not be extended to suppliers of all hues. As it is there is a TDS on professional and technical services as well as on payments to contractors and brokers. It will not be too much of a burden if all companies for example are mandated to deduct a 2 per cent tax from all the bills, whether for supply of goods or services, towards ad hoc payment of income-tax. Indeed this would be in keeping with the spirit of VAT (value added tax), which does not discriminate between goods and services and instead focuses only on value addition. The suppliers especially those who have been evading tax with impunity would in its wake not be as blasé. They would instead take their tax responsibilities more seriously now that they have come under the tax scanner. The buyers would also comply for the fear of the related expenses being disallowed otherwise.

The various presumptive taxation schemes in the statute lack the bite. It is time they are given teeth. A small retailer — turnover less than Rs 40 lakh — for example is deemed to have made a profit of 5 per cent on his turnover. But this presumption alone is not enough. The botttomline is collection of tax. Unfortunately all the schemes blithely ignore this aspect.

The collection of tax in this case should be dovetailed with, say, collection of municipal tax. Moreover, a retailer typically is the most difficult to assess inasmuch as bulk of his dealings is in cash.

In the event, it is idle to expect him to come clean on his turnover. A flat amount, therefore, should be collected alongwith municipal taxes with an option to file return to claim refund where the retailer feels he has been overtaxed.

Likewise, presuming a profit of Rs 3,500 per month by a heavy-duty truck would at best a half-baked solution to the problem of tax evasion by truckers in the absence of in-built collection machinery in the scheme.

Instead mandated should be the payment of a set amount, say, Rs 5,000 per truck as tax with the liberty being given to its owner to claim refund by offering oneself for scrutiny.

And this amount should be collected through stickers sold by Road Tax Authorities. Presumptive taxation schemes the world over have worked well in tandem with TDS or tax collected at source.uld go a step further and spell out what is the tax that is payable, period. And this should be collected in such a way that evasion is impossible — in lock step with some other statutory impost that is better administered. This presupposes extensive cooperation between various government departments transcending Centre-State divisions.

(The author is a New Delhi-based chartered accountant.)

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