The Hindu Business Line : Some ‘pain points’ for the Finance Minister

With the Finance Minister in the midst of a summation of earlier Budgets, here are some irritants in the tax system that need to be addressed at the earliest, to prevent harassment of the genuine taxpayer.

G. Srinivasan

The Finance Minister, Mr P.Chidambaram, is in the midst of making a summation of all his earlier budgets, for Union Budget 2008-09. With the UPA Government facing general elections in 2009, expectations run high of a populist Budget, also reinforced by the results of the recent Gujarat and Himachal Pradesh assembly elections where the BJP cruised back to power comfortably. A cursory glance at the mid-year review of the economy, presented to Parliament by Mr Chidambara m on the last day of the winter session, and the subsequent endorsement to the Eleventh Plan by the National Development Council on December 19, showed that for greater inclusive growth, there is a clear need to foster the fiscal space.

Expenditure on both social and physical infrastructure on the back of increased demand on resources is feasible only if there is a review of extant subsidies on food, fertilisers and petroleum products. Even as one hears that adjustment in petro product prices is on the anvil, the government needs gumption to tackle the escalating food and fertiliser subsidies.

Limited latitude

Be that as it may, the Finance Minister is in an unenviable state today. Faced with narrow elbow-room for expenditure control, the so-called non-Plan expenditure of subsidies, interest payments and defence expenditure, which form a major component of this segment, the FM might have to fend for additional resources through the time-tested tack of taxation.

Here too, the latitude is not much as the taxable limit has been reached long ago and worldover, the trend is moderate tax rate formaximum revenue through increased compliance.

Then what is the way out? Committee after committee has been highlighting the need to remove unjustifiable tax exemptions. Yet influential lobbies that had developed vested interests over the years in appropriating the benefits of such exemptions put up a fierce fight. Hence the effort is confined to documenting the loss to the exchequer from tax breaks/exemptions bestowed upon different segments of the economy, in the expenditure document of the Budget.

Since the Finance Minister invariably expatiates on the virtue of moderate tax regime contributing to greater tax compliance with distinct improvement in tax revenues, it behoves of the system he presides over to be more understanding of the hardships that genuine taxpayers at different levels undergo at the hands of the authorities. Accountants conversant with tax system highlight a such anomalies.

Draconian provision

A draconian provision in the IT Act pertains to Section 234B, which stipulates levy of interest on the tax on the assessed income, as distinguished from the returned income from the date of the beginning of the assessment year till the date of the completion of the assessment.

The assessee is liable to harsh penalty by way of this levy, which is well-nigh equivalent to the tax levied on the assessed income. Though on paper Chief Commissioners of IT are empowered to waive this interest, in practice, nobody does it lest it be construed as abetting an omission! Hence, it would be better to delete the provision in toto as it would accord great relief to assessees.

The tax statute, as it stands today, is replete with provisions where penalties are levied without application of due diligence and almost in a mechanical manner. This is particularly so when a case is surveyed or searched. Even if the assessee extends cooperation, penalty is levied.

No wonder practising accountants warn that presumption of guilt in case of assessee should be avoided when penalty is levied and a huge collection is made. The timeline for the completion of the assessment in respect of all cases must be reduced substantially, including in search cases.

On the sale of immovable property, the Government is toying with the guideline value for the purpose of working out the capital gains, ignoring the sale consideration. This is against ground realities since guideline values nowadays are much more than the market value. Levy of capital gains tax on the notional increase in value should not be countenanced.

Rent from properties for commercial purposes, such as warehouse, godown and office, should be charged under business head and not property. Property income should be confined to residential buildings.

Transfer pricing

Under Sections10A and 10B, tax exemption is granted on the incomes of 100 per cent export-oriented units (EOUs) and units in special economic zones and software technology parks (STPs) doing IT business to service overseas customers. But the provision of transfer pricing, which is made applicable to these units, poses difficulties. There is scarcely reason to subjectthese cases to transfer pricing since their entire income is exempt. Yet even these units are made to fork out tax because of the adjustments made by the transfer pricing officer to declared income. Hence units claiming exemptions u/s 10A and 10B should be removed from the purview of transfer pricing regulations.

Transport troubles

The transport sector plays a key role in catering to the industry’s needs and is deemed the major driver of the economy. This sector is subject to dislocations because of archaic tax provisions.

Take, for instance, the lorry business. Section 40A (3) prohibits payments in excess of Rs 20,000 in cash. But, a major component of the expenditure in the case of the transport firm is lorry hire. Companies hire lorries from the public and transport goods to various destinations.

Goods might be booked from Kolkata, Mumbai to Delhi, Chennai. Actual hire charges could be in the order of Rs 70,000 to Rs 80,000, of which nearly 80 per cent has to be disbursed at once as advance. In point of fact, this sum is used to meet the expenses of drivers, cleaners, vehicle repairs necessitated on the highway, tyre and tube replacement and other costs on the way that can be met only by cash.

If these payments are disallowed on vehicles (plying for a couple of days on the national highway) while computing the total income of the transporters, they will have towind up business or book no orders. Tax authorities should be sensitiveto this ground reality and accordingly raise the limit to Rs 1 lakh.

In a transport organisation, major payments are made to the owners of the lorries through the drivers who are often illiterate and unable to furnish the particulars such as PAN and correct address. Without these details, it would be impossible to file electronic tax deduction at source (TDS) returns. The non-filing of returns by transport companies invitesheavy disallowance.

Where the transport companies paid tax at source from out of their own kitty, the company would not get the expenditure allowed since the requisite details are not available to them from their illiterate drivers. Tax authorities might mitigate the rigours of the provision in such a manner that the gross amount represented by TDS should be allowed as deduction.

Positive signals

With the Finance Minister paying meticulous attention to details in every proposal he makes, the time has come for him to send some positive signals to tax payers.

Whatever tax burden they are asked to bear in the larger interests of development of the country they will do so uncomplainingly, provided the irritants in the real implementation of the tax provisions are removed. Tax officials could also serve taxpayers with a sense of service and not with an air of ‘extracting the last penny from them.’