BUDGET SPECIAL

New Delhi, 25 June 2009

Attention Finance Minister

CUT DIRECT TAXES, BOOST SPENDING

By Shivaji Sarkar

It is one of the most turbulent times for the economy. Equally, it is one of the most difficult times for Finance Minister Pranab Mukherjee for giving the final touches to his budgetary proposals. He has too little in his kitty and the nation is looking to him to offer a tax bonanza. No Finance Minister in the recent past had done such a tight rope-walking.

In this limited option, he has to closely review the tax policy. He has the problem of reducing prices, increasing industrial and farm production, create jobs and earn less revenue. The recent trends on the revenue front for him have not been encouraging. But growth momentum has to be his top priority.

The stimuli announced in December, January and in the interim budget did not have a significant impact. They were all in the nature of cut in indirect taxes. The industry had its benefit but largely did not pass it on to the consumers.

The budgetary process also has to counter the global protectionist trends in the US and West. It has to fight with the subsidies the US administration is extending to different sets of industries and the farm sector. The protectionist trends have hit the export-based industries hard. The FM has to rehabilitate these export units, which have sacked about 13 lakh employees, create conditions for sustenance of the IT industry, ensure better corporate governance and boost confidence and create an atmosphere of hope all around.

World Bank projections for a booming India is on a long term basis. It cannot be achieved unless the “doctor” –finance minster- writes the right prescription. But all agree, including the denizens in the finance ministry that the time has come to have a relook at the tax structure and wherever possible extend relief.

The experiment with indirect taxes has not yielded the desired results. The obvious choice is to play with the direct taxes. There are many lobbies suggesting different methods. The strongest one backed by the political parties’ favours increasing threshold limit from Rs 1.5 lakh to Rs 3 lakh. It is a populist demand. It serves a political purpose in the short run for placating a segment of the population for vote bank politics. It certainly is not beneficial in the long run.

The nation needs to widen the tax base. Increasing the threshold limit from time to time is not a sanguine economic judgement. Letting a large section move away from the tax net is not desirable. Besides, it does not help anyone much. At that level taxes are at the lowest level. What needs to be considered is how to lessen their burden because that decides the base for taxes at higher strata as also empower the people with extra cash so that they can go to the market. Theoretically, they should remain the taxpayer even if it is a token amount of Rs 1000 a year.

The minister, however, has to reconsider the tax rates, which at the highest rate with surcharge comes to around 33 per cent both for individuals and corporate. In simple terms, it means robbing one of one-third of his income. This is too harsh, impractical and leads to complicated procedures of seeking deductions through devious methods prescribed in the Mahabharata of Income Tax rules.

These methods often help many persons, proficient with rules and right connections, to reduce their burden to around 23-24 per cent. But the others end up paying high taxes. The FM has to rationalize it not only for procedural reasons but also for the purpose of giving a boost the sales of products and ensure sustenance of the industry and entrepreneurship.

Clearly, the recession has robbed the people of their capacity to buy.  The small measure of re-jigging the tax rates would lay the foundation for low but effective tax regime. The FM has to ensure that there are not more than two tax rates beyond the threshold limit. He should levy a token tax at the lowest limit as discussed. Beyond that he should bring it down to 12 per cent up to an income of Rs 6 lakh and 17 per cent beyond that.

He may have some concern over how to tailor savings and certain other incentives that traditionally the tax procedures ensure. Normally the people should be trusted to do it. But under no circumstances can there be an absolute trust. Some may always do it and some may never. It is the latter who have to be reined in. For this purpose, he can include another two per cent in the tax rates or round it off to 15 per cent at the lower limit and 20 per cent at the higher limit. Even after giving concessions his effective tax rate would remain slightly lower than the present accruable rate.

A direct benefit would be higher revenue realisation. The lower tax rates would tempt many business people, who invariably try to evade taxes, to pay it. The government can say that it had been offered a flat rate of Rs 1400 at one time but they did not come forward. It is true. The reason is the complicated tax rules and the tendency of the department to harass the honest taxpayer. The FM has to simplify the rules and stop the practice of harassment.

The income tax department must be told that a technical non-inclusion of some tax measures is required to be seen in the proper light and do away with the provision of penalty in most cases. The taxpayer must be given his due honour for participating in the process of nation building. He should not be treated as a criminal. In case of some miscalculation or oversight, the assessee should be let off after he pays the difference.

Likewise, the post-tax appellate procedure also must be simplified. It is too time consuming and burdens the exchequer with a heavy cost. This needs to be curtailed. If the rules are simplified, the department’s staff and infrastructure cost could also be reduced. It would be a big savings in these difficult times.

Similarly, he has to simplify the provident fund withdrawals which invite high taxes. This too can be simplified by levying a flat token tax of a low sum. The basic concept should be to earn revenue on a regular basis and leave people with enough cash to buy and sustain the market.---INFA

(Copyright, India News and Feature Alliance)