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New Tax Code:DUMP IT, REDRAFT ANOTHER, by Shivaji Sarkar,21 August 2009 Print E-mail

Economic Highlights

New Delhi, 21 August 2009

New Tax Code

DUMP IT, REDRAFT ANOTHER

By Shivaji Sarkar

The new tax code was supposed to be simple, unambiguous, easy to understand and help individuals assess their tax liability without assistance. It has failed miserably on all these counts. It has neither changed the tax rates nor the liability. Old wine in new bottle, if it at all can be called new, would not serve the purpose for which the exercise had been undertaken. Clearly, the ostensible purpose of better tax compliance would not be achieved.

A glaring flaw is that the tax code is trying to ape the western system. The country no more needs to do so. What it needs to do is to evolve systems that are best suited for its economic and cultural conditions. Joint families in both rural and semi-urban areas, legally declared or not, is the norm. They often have to depend on one income. The tax code has ignored this crucial aspect. It has also not taken into account the erosion of the purchasing power of the rupee while fixing the supposedly new rates. Mostly the old rates have been retained from 10 per cent to 30 per cent, as at present. Indeed, the bureaucracy does not like reforms or change. So it has not done its basic homework to bring in the tax revolution and add to the Government’s kitty. 

Sadly, the euphoria that it is ushering in a low tax regime is misplaced. The tax rate at the lower level –Rs 1.6 lakh to Rs 3 lakh - has been retained at 10 per cent. This is the most vulnerable class of the society, which has faced severe erosion in income due to high inflation. At that level if one has to pay a tax of Rs 10,000 to Rs 30,000, it would clearly upset his home budget. This class needs to be integrated into the tax system but not in a punishing manner. It should be asked to pay a token tax between Rs 1500 to Rs 4000 a year. This class is the poorest in the society and needs the maximum relief. In reality, income up to Rs 2 lakh should not be taxed at all. Let this class prosper and later allow it to pay more.

The Government can say that it has given relief up to a level of income of Rs 10 lakh. But with the rise in prices, house rent, health care, transport charges and cost of education, 10 per cent tax rate is extremely high. The code also has not taken into consideration future inflation rate. Remember, the Income tax Act was enacted in 1961 and after almost 50 years an effort is being made to usher in a change. But if it carries the baggage of the past and lacks a futuristic vision, it is better not have a new document.

It is only going to complicate the issues further. Those earning up to Rs 10 lakh per annum are far poorer than those who had been earning Rs 10,000 a year in 1961, if we compare it on the basis of prices and the cost of living indices. Thus, if the Government wants a better tax compliance from this section, it must reduce the rate to five per cent.

The entire rates have been considered on the basis of income of the salaried class. Apparently, the code drafters forgot that there are other sections of people working in NGOs, businesses and other activities. They have a cost in running their businesses and to skip the tax they fudge the accounts. Unfortunately, the tax code has not tried to make the payment of tax lucrative for them. A lower tax rate at five per cent would be an incentive. It would bring in more revenue.

Similarly, the slab above Rs 10 lakh also needs to be redone. There should be a slab of Rs 10 lakh to Rs 15 lakh, which should be asked to pay at 10 per cent. Those earning beyond Rs 15 lakh should be asked to pay a maximum of 20 per cent. There is no rationale for having a 30 per cent rate for individuals as even now an individual, good at complicated tax calculations, does not pay more that about 23 per cent of his income as taxes.

The concept needs rationalization. It would definitely entail efforts at redrafting. It may also cause some delay in implementation of the new tax law. But it would be a worthwhile exercise. It would effectively bring down the rates and that would ensure better revenue realization.

Likewise, corporate taxes too should be redone and brought down to the effective rate of 25 per cent. At present, most corporates with minimum alternative tax (MAT) and some other provisions would end up paying almost 36 per cent as tax. This is highly oppressive. If the Government wants to ensure a low price regime, it must also ensure low cost system, which unfortunately the new tax code does not promise. Unless it does so, the present system of tailoring corporate balance sheet to suit the tax needs will continue. The tax code has to make a costlier provision by ensuring an affordable tax regime.

It is also not wise to include the leave travel concession (LTC), rent free accommodation, medical reimbursement, retirement benefits and leave encashment in the tax calculation process. An employee is given LTC for two purposes – to see the country, help in the integration process and also generate business and incomes of people living away from central hubs. Undoubtedly it is for a social purpose and must not be taxed. Medical expenses are reimbursed for ensuring better health of an employee and his family. If it is taxed it would burden the nation with higher health care costs. A rent-free accommodation is often given for the purpose of carrying out a business and to make a job look lucrative. Taxing it may create problem for organizations working in remote areas.

The concept of doing away with some other exemptions also needs to be re-looked only if the entire tax slabs are restructured. The purpose of a new tax regime has to be pro-people, growth orientated and not just mere revenue collection. The tax instrument should be used as a tool for ushering in social change and honest behavior, not for empowering bureaucrats.---INFA

 (Copyright, India News and Feature Alliance)

 

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