Taxing matters

The devil, they say, is in the detail and this is particularly true of Indian tax laws. A key reason for the country’s exceptionally narrow taxpayer base and frequent tax litigation lies in its unpredictable tax regime, brought on by the grey areas in the Income Tax Act of 1961 and the scope for arbitrary interpretation of its provisions. The Justice RV Easwar committee was tasked with simplifying the Act and ironing out areas of frequent dispute in October last year. It has now come up with its first set of recommendations, which can greatly reduce the compliance burden on the small taxpayer.

Successive governments have tried hard to woo Indian savers to equities through a concessional capital gains tax regime. But such efforts have been stymied by the taxman’s own interpretation, for instance, by treating stock market profits as business income rather than capital gains, on a case-to-case basis. The Easwar panel disentangles this problem by specifically including ‘securities’ held for more than 12 months in the definition of ‘capital assets’. It also recommends that trading profits from shares amounting to ₹5 lakh or less a year, be treated as capital gains even where the holding period is less than 12 months. This amendment, if implemented, will give a fillip to stock market liquidity and persuade small investors to be more active while managing their equity portfolios. The omnibus provisions on Tax Deduction at Source (TDS) bring in two-thirds of the country’s personal tax collections and are an easy means for the IT department to meet its annual revenue targets. But TDS is also iniquitous, as it sweeps many citizens who fall below threshold limits — such as pensioners and homemakers — willy-nilly into the tax net. The panel’s recommendation for raising the threshold limits for TDS on such things as interest from deposits is welcome. It has also sought to reduce the burden of compliance among the self-employed. A presumptive tax regime for professionals and doubling of the threshold for businesses required to maintain audited accounts, will provide immense relief to small business owners.

Overall, the suggested changes can go a long way in freeing smaller taxpayers from the tyranny of the taxman and help widen a tax base that is overly reliant on salaried individuals, while leaving out the self-employed. But the task of reviewing tax provisions must be based on evolving circumstances. Periodic reviews are necessary if India is to have a non-confrontational tax regime; the Central Board of Direct Taxes should conduct such reviews and issue clarificatory orders and circulars on contentious issues. Such a proactive approach will signal that the tax administration is willing to hold itself accountable to its customer — the law-abiding taxpayer.

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