Economic Highlights

New Delhi, 11 June 2010

New Tax Code

MAKING LIFE MORE DIFFICULT

By Shivaji Sarkar

“My appetite is infinite and greed is more”, says Finance Minister Pranab Mukherjee to income-tax commissioners exhorting them to collect more. He also hinted at unfolding the revised draft of the Direct Tax Code and phase out deductions.

The finance minister has only hinted at more trouble for the citizens as he called upon the officers to surpass the target of Rs 430,000 crore set for the current fiscal year. The phasing out of exemptions would effectively increase the tax rates as there is no proposal to reduce the present slabs.

It also opens up the debate of having income-tax, as an oppressive tool of the State particularly in a country that has one of the highest tax rates. A citizen is made to pay almost 65 to 70 per cent of his income as taxes – direct, indirect, provincial and local in addition to various other toll taxes. One obvious fall out of the high tax rates is on the market as it depresses the capacity of the so-called middle class to spend. This lowers activities in the market. The Government’s growth projection at 8.5 per cent is unrealistic as international and independent agencies do not go beyond 7.5 per cent. Therefore, the tax policy needs to bolster this.

Besides, less than 3 per cent of the population come in the direct tax net – that is a little over two crore of  110 crore people. In a country with a low income by most of its people, even after intense efforts the number may not rise much.

The Kelkar committee had noted that for such tax collection “efforts” the Government has been losing 48 per cent of the taxes it collects. Since then the department has added an army of officers, inducted through a fiat of the former finance minister Yashwant Sinha. Logical conclusion is that the Government is losing more money on collecting every rupee that it adds to its kitty.

The citizen is not born to pay all his income to the authorities, whose accountability is often in doubt. The idea for revising the Income-Tax Act was mooted primarily to simplify the cumbersome rules, rationalize the tax structure and simplify procedures in order to reduce hassles created by bureaucratic discretion. An unstated objective was to reduce the rampant corruption. During the last few years a number of income tax officials have been held with huge accumulation beyond their known source of income.

This has been possible owing to large discretionary powers that the officials have and multiplicity of rules that could be interpreted in many different ways. The system is oppressive for the tax-paying citizens. The Direct Tax Code instead of rectifying the lacunae sought to further empower the officials. Instead of simplifying the procedures, it has proposed to complicate it in many ways.

The code has stressed less on willful compliance or creation of a system where one would be tempted to pay the tax. One blatant instance is the scheme launched for shopkeepers who were told to pay Rs 1400 if their turnover was upto Rs 5 lakh. It failed because many of those who filed the returns and paid the tax were subject to a witch-hunt. The officials found it an easy tool to harass the tax-compliant citizens. Thereafter, the scheme failed.

The code needs more discussion. The Finance minister should not be in a hurry to satiate his greed. He needs to look at other ways for reduction of taxes. It is universally known that higher taxes lead to higher evasions. The corporate is master of the art. They fudge accounts to reduce tax burden. The present rate of 33.5 per cent including various cess, is too oppressive. A compliant corporate taxpayer may find himself out of business. That is how there is opposition to the proposed minimum alternative tax (MAT).

If the taxes are at a high level of 30 plus percentage, an individual or corporate would be only forced to comply with it. It would normally be not a voluntary action. The State would have to take recourse to measures such as tax deducted at source (TDS). In a way TDS demonstrates the distrust the State has for its citizens. It only punishes the willful taxpayer and serving class who are not in a position to evade it. Others who can, are allowed to get away.

The Government needs to look at its TDS policy, which has been extended to bank deposits. It is eroding the hard-earned savings of the people. Corporates are not affected by it. Reclaiming the money invites a cumbersome procedure and sometimes greasing of the palm does wonders. But the Government guided by bureaucratic convenience is not interested in doing away with it.  The citizen continues to be harassed and the government fills up its coffers with money that is not due to it.

So far the revised draft has not proposed any change in the basic tax structure. Unless it does that there would not be any rationale in doing away with exemptions being given now. The basic idea to do away with the exemptions emanated from the suggestion of bringing down the highest tax rate to 20 per cent. The other slabs were expected to be of 10 and 15 per cent.

The tax code has ignored this basic and instead went on to increase the tax burden by doing away with the exemptions. This is neither an honest practice nor does it simplify the procedure.

A tax payer should be encouraged to pay it voluntarily if the income tax has to continue. It should be looked at whether doing away with income tax would reduce expenditure of the Government or not. The assumption is that a Government making its tax administration heavy and oppressive ends up spending more.

This is also evident from the finance minister’s admission that litigations have increased manifold as the tax administrators made unreasonable assessments and demands. The code has not addressed this issue. It is being redrafted after 50 years and is to last for the next five decades. It should not be a half-hearted effort to continue with the past ills. Instead of hurrying through, it calls for an even more intense discussion and enactment of procedures that make voluntary compliance, including filling up of forms, easy and rewarding. ---INFA

(Copyright, India News and Feature Alliance)