Rewriting Direct Tax

Boost growth, savings?

By Shivaji Sarkar

The new direct tax (DT) law must be revolutionary and a model for world economy. The government’s decision to set up a new panel to amend the Income Tax Act 1961 was a necessity after the indirect tax changes.
However, the government has to break away from most other countries, consider doing away with the personal income-tax (PIT) and reduce the corporate rates. It also has to devise a simple system with low tax rates, easy calculation with a view to making people comply with ease.
The corporate rate cuts would have sanguine effects on production cost that helps bring down prices and make the demands soar. The key to progress, however, is disposable income that would help increase sales and industrial activities. Along with this the setting up of the new Finance Commission is also an appropriate move mandated by Article 280 of the Constitution to relook at the GST distribution. Presently, the States get 42 percent of it.
The PIT, however, is a small part of the overall DT kitty. Its abolition or not will not make much difference. The present addition of about 5.6 lakh individuals, as per the Economic Survey II, are mostly at an average level of Rs 2.7 lakh annual income, almost at the threshold level – Rs 2.5 lakh. So the addition would add marginally to the overall accrual.
During NDA-I an effort was too made to review the direct taxes. The Vijay Kelkar Committee in 2002 had suggested certain rate changes such as income of Rs 1-4 lakh to be taxed at 20 per cent and above that at 40 per cent. It was found to be too steep and never implemented though its other suggestion like disincentivising savings is now a practice.
The recommendations of the Direct Taxes Code 2009 during UPA raised storm as the rates suggested were impractical. No fundamental change was suggested. Mostly the rates were tried to be tweaked at 1.6 to 10 lakh at 10 per cent, Rs 10 to 25 lakh at Rs 84,000 plus 20 per cent; and above Rs 25 lakh –Rs 3.84 lakh plus 30 per cent.
The scope of income was expanded to include value of perks, value of gifts, profits in lieu of salary and capital gains. Some of these like perks are now taxable through an amendment in the finance act.
The DTC also suggested, unwisely, ending incentives to savings schemes. Though the DTC never became the law, savings incentive has now been limited to a mere Rs 1.5 lakh a year. This has become a major issue for the Indian economy that has for ages been boosted by personal savings.
Further, it has also led to doing away by the banks of long-term savings plan in a society that has pension or post retirement benefits limited to a very small percentage of the population. Another proposal of the DTC to tax PF, PPF at the time of withdrawal is also now a practice which should be done away with.
The present panel would be headed by Arbind Modi, who about eight years back had helped draft the DTC. It was unveiled by former finance minister Pranab Mukherjee. The DTC bill was introduced in Lok Sabha in 2010, but lapsed with the dissolution of the 15th Lok Sabha.
Now the new panel would factor in the direct tax system in various countries, international best practices, economic needs and other related issues and asked to submit its report in six months. This is an onerous task for the Modi government. The country has been facing enormous problems in the income-tax arena. This panel would be expected to simplify the tax procedures and bring in clarity.
A key factor it has to look at is at the tax burden on the people. The present tax rate of 30 per cent plus 3 per cent cess is often termed as impoverishing tax. Rightly so. It deprives a salaried earner virtually of over four to five months’ earnings. Can any individual survive with an income of seven months for 12 months?
The best is to abolish PIT or exempt it to Rs 15 lakh. Beyond this the tax should not be more than 10 per cent. In the case of corporate it should be around 18 per cent. It would bring in transparency and end possibilities of fudging accounts and corruption. In fact, the tax system has become a mockery for most people. The salaried earners cannot save taxes but others in businesses manage it through their balance sheet.
This also leads to litigation, which goes on for 15 or more years in some cases. The government does not take into account the money spent on unnecessary litigation and harassment of the taxpayer. This also, it is well known, leads to rent seeking.
At the same time, the government has abhorrence for exemptions. But it has to look at many issues in this complex society. Presently, no allowance is given for those who have to pay heavy medical bills or who are in uncertain jobs. Not everybody can afford insurance. Shouldn’t such people be given concessions in paying their taxes?
Similarly, expenses on education are skyrocketing. If a part of education expenses are given tax relief it would help millions, the next generation that a society needs to take care of. There are many other such issues. The government cannot go with a closed mindset or only with the goal of increasing revenue.
The new panel also needs to look at the tax deduction at source (TDS). It convolutes a lot many things and suppresses income. It deprives the possibility of accrual of bank interest rates and further impoverishes the earner.
The TDS was introduced to help government earn advance revenue, which is normally due only in the next financial year. The practice may be helping the income-tax department but is unethical. If the same was done by a private body, it wouldn’t be allowed by the judiciary.
The panel should ideally consider doing away with the TDS. If for any reason it doesn’t want to, it should pay a minimum interest rate of seven per cent a year on the TDS amount as it is an advance payment and a kind of term deposit. Effectively this would incentivise tax payment as also shave of a part of the taxpayers’ burden. Undeniably, rewriting direct taxes in an appropriate manner would boost the economy, reduce corruption and save the government from being caught in litigation.—- INFA