Building a Better India – Part 5: Bringing tax reforms

All minor taxes and levies whether at central or state level or of municipal bodies must be abolished because these authorities may be spending more money on collection or recovery than the revenues
All minor taxes and levies whether at central or state level or of municipal bodies must be abolished because these authorities may be spending more money on collection or recovery than the revenues

We discuss the many changes that can be made in taxes that affect individuals, companies, the market environment and government revenue.
In the light of these hard and bitter realities; the following tax reforms/ changes are suggested.

Excise Duty:

The literal meaning of the word excise is a tax on goods, and it is to be charged only on manufactured/ produced items and hence its actual name should be “Manufacturing tax” unless it is replaced by the proposed GST. The state excise duty on alcohol and liquor, a British legacy, should be done away with and the authority for collecting and distributing the excise on it should vest with central govt.

The excise duty should be focused on main revenue generating products and articles. Hundreds of small and minor items particularly those manually made or produced in mini or small scale units with miniscule revenue contribution must be made excise free unless such items are intermediaries in nature or act as raw material for major excisable products.

Reduction/restructuring/consolidation/simplification is certainly possible if there is political and bureaucratic desire, will and wish to ease the life of tax payer and tax authorities. There is no logic or rational in imposing excise duty on coal which is a mineral and not a factory manufactured product more so when cenvat credit on the same is available.

The following different Acts relating to excise duty should be repealed and consolidated in to one modern single Act called - Indian excise duty and tariff Act :

A. Excise ( Spirits) Act,1863
B. Excise (Malt Liquors) Act, 1890
C. Provisional collection of taxes act 1931
D. Central Excise Act, 1944
E. Additional Duties of Excise ( Goods of special importance) Act, 1957
F. Additional Duties  of Excise (Textiles and textile articles) Act, 1978
G. Central Excises and Salt Act, 1985
H. Central Excise Tariff Act,1985
I. Union duties of excise(distribution) act 1979
J. Union duties of excise(electricity distribution) act 1980
K. Finance Act 2004/2007 to levy education cess on excisable goods.

Customs Duty:

The existing  laws viz. Customs act 1962 , Custom tariff act 1962 and valuation rules 1988 have become old and undergone multiple changes and amendments since their inception and they should be modernised and consolidated in to one single law called “ Indian customs and Tariff Act “ with simplicity and based on court judgements to avoid any ambiguities .

The basic duty structure should be finalised and made permanent for 5 years at a time and not subjected to change every now and then and product wise codes and numerous sub-codes should be drastically reduced and restructured. Only additional custom duty, Special custom duty and anti dumping duty should be amenable to change as per requirements and circumstances.The rules, procedures, paper work and formalities should be suitably reduced and simplified to save the time of both importers and customs department.

Service Tax:

The service tax introduced in 1994-95 has now spread to all types of services except 17 mentioned in the negative list, and tax collection has gone up from just 3943cr in 1994-95 to 132600 cr during 2012-13 with about 17.12 lakh Assesses. Most surprisingly, the budgeted service tax collections for 2014-15 at 215000 cr will exceed excise duty collections by 15000 cr. Undoubtedly the incidence of service tax is quite heavy at almost 12.5% and needs to be reduced to flat 7% for wider and better acceptance, coverage, compliance and resultant higher gross collections.

Goods and Services Tax:

The proposed GST model has following pitfalls:-

GST will have two parts one CGST to be levied by centre and the other SGST to be levied by states and will apply to same common base of goods and services classified in 4 baskets with first for exempt items, 2nd at a nominal rate of 2% for precious metals etc, 3rd concessional rate and 4th standard rate as per existing structure.

This will disentitle the input credit to exempt categories for industrial and commercial constructions, real estate and infrastructure sector.

The alcohol and liquor sector has been kept outside GST without any proper reason or rationale and will continue to suffer the cascading (denial of input credits) and with mountains of formalities, restrictions and licences.

Petroleum has been initially kept outside the GST regime. Why?

CST will reappear in the new form of CGST either at 2 or 4% .So no relief from hassles, formalities, paper work, filing returns etc associated with this paltry 2% tax.

The impact of service tax will further go up as both centre and state will be entitled to charge.

The overall burden of excise duty, CST and VAT will remain same or will perhaps go up to average around 23% due to added burden of service tax both by centre and states.

The excise duty now invisible for the end consumers will pinch them as they will be paying both CGST and SGST.

The proposed model of GST will, therefore, not be a major tax reform unless the tax base is widened and rates are lowered and petroleum and alcohol are compulsorily included in it’s ambit. CST should be abolished completely and all other taxes such as state excise duty on alcohol & spirits, Octroi, entry tax, cess on minerals, TOT, profession tax, entertainment tax, luxury tax, electricity duty etc should be completely subsumed in GST.

The Indian Income Tax Act 1961 and proposed Direct Tax Code:

The Proposals DTC could be reviewed based inter alia on above observations and following suggestions:-

Minors above the age of 15 should be allowed to pay taxes on their legitimate self earned income and income earned on gifts received from blood relatives and file income tax returns and their income should not be clubbed with parents.

No need of two sets of depreciation rates for limited companies and review of system of MAT payment. If not abolished, the MAT should be renamed as Future income tax (FIT) and should be not more than 10% and eligible for interest at12% and refundable if not utilized/set off in future due to losses or closure of business.

The new Act should provide total exemption of tax payment in respect of interest and dividend received by Indian holding companies from their foreign subsidiaries.

Individuals who are not agriculturist by profession or not doing self cultivation should not be allowed any kind of concession on their income derived from agriculture and should be taxed as normal income.

The provision of wealth tax of just 1% on wealth exceeding one crore will not be cost efficient (the wealth tax collection for 2012-13 was a meagre sum of 845cr) particularly in view of complex system of valuation of various assets and hence either it should ideally be abolished or charged at higher rates slab-wise but only on tangible and productive assets exceeding 2 cr with two self owned residences exempted  and with simplified valuation rules and/or leaving the valuation part to the conscious of the assesses.

All kinds of income of an individual irrespective of source, kind or form should be made taxable with only a handful of clearly defined deductions allowed without the ritual of changes in every annual budget .All kinds of subsidies/concessions to industries need be withdrawn and banned particularly to stop intra-state flight of capital and lop sided development.

The taxability of notional income in respect of vacant residential flat and wealth tax on second residence of a tax payer should be withdrawn.

To avoid complexities and disputes with tax authorities; the amount directly paid by business assesses through banking channels towards telephone bills, car maintenance expenses including driver’s salary, house electricity and maintenance bills, medical expenses and club bills of employees should be allowed as a business expense and the same should be tax free for employees in full or up to say 15% of the total salary income earned.

The income tax should be charged on a flat rates basis and separate education cess and surcharge etc. on top of it should be abolished.

The details of administrative set up and rules for administration of the direct tax should be excluded from the main Act by delegating this duty and powers to the “Central Board of Direct Taxes” by provisioning in the DTC that rules framed by CBDT shall be construed and treated as law, but at the same time CBDT should not make itself a super power house and start making discretionary, unnecessary and complex rules.

For better compliance and to discourage circumvention and to increase the tax payers base; the taxation rates for partnership firms and companies must be reduced and should be as per slabs in progressing/ graduating order of taxable income.

Taxability of interest income on loans only on receipt basis snf not on accrual basis.

Similarly share sale transactions of unlisted/unquoted Ltd. Or Private Ltd companies below the book value of the respective company get taxed.

The private sector employees devoid of DA benefit unlike govt staff should be entitled to some special tax exemption to partly mitigate the adverse effect of inflation.

The dividend distribution tax of 12.5% is illogical and unjustified as dividend is paid out of income already taxed and thus it amounts to double taxation and hence it should be ideally withdrawn.

Repeal the Entry, Chungi tax and Local Taxes:

The imposition of entry tax and Chungi pose great difficulties on the goods carriers/ businessmen to comply with due to associated paper work, delays and formalities and should be repealed throughout the country. This nominal tax, already declared as unconstitutional by Calcutta high court, unnecessarily delays the goods carriers and is a source of corruption. The revenue lost on this account can be easily compensated by suitable increase in the state VAT taxes.

But in case such avoidable sundry levies are to be continued these should directly go to the concerned municipal Body for exclusive spending on the development, improvement and beautification of the concerned city/town and not a penny should go to the state government’s coffers.

Multiple Taxes/ Charges on Share Transactions:

The NSE / BSE are charging multiple taxes and fees from the market participants, most of whom are either speculators or day traders, as under which need to be reduced/ rationalised and consolidated in to just one tax called “ securities trading tax”  :-

1. 12% Service Tax on Brokerage
2. Education Cess on the said Service Tax
3. Transaction Charges
4. Education cess on transaction charges
5. Stamp Duties by treating Share Transactions as contracts instead of mere transactions of buy or sell.
6. Security Transaction Tax (STT).
7. Turnover Tax

Just imagine how much unnecessary work load is imposed on brokers by imposing 7 different kinds of taxes. This should be consolidated into a single tax.

Common Accounting Year For All Entities:

It should be made mandatory for all individual and legal entities including trusts, clubs, associations, cooperative societies and others to adopt the period of 1st April to 31st March as its financial year without any exception, to have uniformity, clarity and administrative convenience. New Companies Act 2013 has already made it compulsory for limited companies.

All small and minor taxes and levies as here under should be withdrawn along with repeal of related laws:-

1. Promissory notes (stamp) act 1926.
2. Salt cess act 1953
3. Minerals oils duties act 1958.
4. Produce cess act 1966
5. Interest tax act 1974
6. Iron-ore cess act 1976
7. Jute cess act 1983
8. Agriculture produce cess act 1940
9. Hotels receipts tax act 1980
10. Research and development cess act 1986 and Cess on minerals,
11. Electricity duties
12. Cess on income tax, service tax, excise duty and custom duty
13. Entertainment tax
14. Land revenue
15. Agriculture income tax of 1% on tea gardens by state govts.

To sum up the arguments above, one can quote an example. During 2011-12 the govt of Haryana earned tax revenue of Rs14,100 crore from sales tax (vat), Rs2,800 crore from stamp duty, Rs2,800 crore from state excise duty on alcohol, Rs700 crore from taxes on vehicles; while collection from land revenue was a meagre Rs14 crore, from electricity duty only Rs145 crore and entertainment tax of just Rs45 crore. Will any one explain the logic, basis and need of imposing last three petty taxes, which only harasses the general public, breeds corruption and impose unnecessary formalities. Perhaps the cost of collection exceeds the actual amount of taxes collected as the last three taxes are only 1% of the total collection of other four major taxes.

Therefore it is most imperative that all minor taxes and levies whether at central or state level or of municipal bodies must be abolished to make the life of people/businessmen/industrialists easy, comfortable and peaceful and pave the way for ease of doing business to enable high economic growth.

Building a Better India-Part1: How to create a smaller and smarter government

Building a Better India-Part2: Transforming political landscape

Building a Better India – Part 3: Bringing systemic changes in constitutional bodies

Building a Better India – Part 4: Identifying tax issues

(Kolkata-based Dalbir Chhibbar practised as a CA till 1990 and later started his own buinsess)




2 years ago

Tax Reforms need to be broader and need to touch the lives of ordinary people, especially salaried people.

1. We first need income tax exemption on payment made towards various taxes, such as property tax, road tax and other taxes paid directly to the government.

2.No taxation on bills paid for basic government and public services.

3. If you look at the Travel Allowance its a mere Rs.800 which has not changed and does not even consider people driving to work.
Fuel Reimbursement upto 1 lakh on producing bills should be mandatory.

4. Empower the youth and next generation, allow tax exemptions on first car or first home repayments at a higher rate to encourage saving and building a good future.


2 years ago

It was an interesting read and a move in the right direction. However there are smaller things that bother people on day to day basis, and some of the top concerns of limited salaried employees are the following:

1. Travel Allowance = Rs.800 ??? Does our government wish everyone to go to work by bus ? How about fuel reimbursements!

Fuel Reimbursement upto 1 lakh on producing bills is mandatory.

2. No double taxation on payment made towards property tax, road tax and other taxes paid directly to the government.
How do we claim tax exemption on taxes ?
3. No taxation on bills paid for government and public services.

4. Empower the youth and build a confident next generation by providing exemptions such as
First Vehicle, First home payments to be exempt from taxation.

I sincerely hope that the govt. does things to touch the lives of ordinary people on daily basis.

Nagesh Kini

3 years ago

From one CA to another -
Today the entire tax structure badly needs an urgent revamp by turning it on its head.
We live not in a progressive but regressive tax regime - whoever has heard of the super rich in India not having to shell out a paisa on crores of unearned dividends and capital gains and the hard hit by inflation elders, pensioners, widows and disabled are punished by having the tedious TDS on the small interest that they derive from the bank deposits?
Their daily necessities like match boxes also suffer cascading indirect taxes like sales tax, excise and vat..
It is high time the citizens shake the government into rationalizing the entire tax regime.
Just complaining is not enough.
Go ahead, many more like me will join with you!
Only the spark needs to be lighted - do it here and now!

Mumbai gets flooded before Monsoon hits!

Even before the Monsoons arrive in Mumbai, the flooded coastal roads are a warning shot for the municipal corporation-BMC

The sun is still out in full force, only a few dark clouds are visible, on their way North. Only a few pre-monsoon drizzles have yet fallen on Mumbai, barely giving respite from the sweltering heat. But familiar monsoon sights have already arrived.


Earlier on Thursday, coastal roads stretching from Mahim and Dadar upto Worli were flooded with water after a burgeoning high tide choked the drainage system. Roads were littered with plastic and garbage thrown back by the sea. According to the India Meteorological Deapartment (IMD), the high tide at 4.56 meters hit the shore at 11.30am and as per the forecast there would be a bigger high tide on Friday measuring close to 4.79 meters.

Like every year, the BMC promised a flood-free Monsoon, but this may render the claims hollow. Mumbai had suffered one of its worst flooding on 26 July 2005. This led the MCGM (Municipal Corporation of Greater Mumbai) to institute the BRIMSTOWAD (Brihanmumbai Storm Water Drains) project. This project was scheduled to complete in 2015 with a plan of setting of eight pumping stations. As of today only two of these eight stations have been set up and two more are in the pipeline.

It wouldn't come as a surprise to Mumbaikars that the project will miss its deadline and be another feather in the delays cap of the Municipal Corporation. Mumbai is still operating with colonial era drainage systems which are a disaster waiting to happen because of their sheer age.

(See more pictures below)



G Pal

3 years ago

How I wish we had waves of water coming in from the Gomti River all over Lucknow to save the people from the sweltering heat of 45 degrees Celsius.

Sensex, Nifty to move in a range: Thursday closing report

Nifty needs to stay above today’s low for avoiding further losses

On Thursday, the Indian market recovered almost all of Wednesday’s losses and tried to stay above yesterday's low. At the beginning of the session the market made an immediate plunge into red territory when it hit the day’s low but made a quick recovery and traded in a narrow range mostly above yesterday’s close.

The S&P BSE 30-share Sensex opened at 25,597 while the NSE Nifty opened at 7,641. After hitting a low of 25,410 and 7,594, both Sensex and Nifty recovered to reach a high of 25,611 and 7,658, respectively. Sensex closed at 25,576 (up 102 points or 0.40%) while Nifty closed at 7,650 (up 23 points or 0.30%). The NSE recorded a lower volume of 119.97 crore shares. India VIX fell 0.92% to close at 16.9025.


Among the other indices on the NSE, the top five gainers were Pharma (1.26%), Auto (0.76%), Finance (0.61%), NI15 (0.57%) and Midcap (0.49%) while the top five losers were Media (1.63%), Smallcap (0.50%), CPSE (0.40%), PSU Bank (0.37%) and Infra (0.32%).
Of the 50 stocks on the Nifty, 29 ended in the green. The top five gainers were Hindalco (4.09%), Sun Pharma (2.95%), Power Grid (2.80%), HDFC Bank (2.49%) and HDFC (2.21%). The top five losers were Bharti Airtel (4.31%), Axis Bank (1.86%), Bank of Baroda (1.83%), Coal India (1.81%) and BPCL (1.10%).
Of the 1,596 companies on the NSE, 798 companies closed in the green, 758 companies closed in the red while 40 companies closed flat.

NTPC (1.33%) was among the top five gainers in the Sensex 30 pack. Recently, the joint venture company between NTPC and NPCIL, Anushakti Vidhyut Nigam, came in the news for being embroiled in legal problems. Under the law only government or its agencies can undertake activities in the atomic field.

Bharti Airtel (3.57%) was the top loser among the Sensex 30 stocks. Credit Suisse downgraded the stock to "underperform" from "neutral" and reduced the target price to Rs265 from Rs275. It is currently trading at Rs341.55 on the BSE.

Hindalco Industries (3.78%) was among the top six gainers in the ‘A’ group on the BSE. There was news that the company's US subsidiary Novelis successfully cast the first production-sized ingot at its aluminium recycling and casting center in Nachterstedt, Germany.

Suzlon Energy which was among the top two gainers in the ‘A’ group on the BSE yesterday was the top loser (4.98%) in the group today.  Jaypee Infratech (4.95%) was among the top two losers in the group. Supreme Court refused the company's plea to direct the Noida Authority to grant completion certificates to its projects falling within a 10-km radius of the Okhla Bird Sanctuary. The decision has an immediate impact on at least 30,000 flats, and puts into doubt the fate of another 70,000 under-construction flats in the long term.


Markit Economics said India's industrial output in April rose to 3.4% from previous -0.5%, while manufacturing output increased to 2.6% in April from previous -1.2% over the year.

US indices closed in the red on Wednesday. The US posted a $130 billion budget deficit in May and the smallest shortfall for the first eight months of a fiscal year since 2008, as a stronger economy and rising employment bolstered revenue. The deficit last month was about $9 billion less than the $139 billion shortfall in May 2013, the Treasury Department said in Washington.

Except for NZSE 50 (0.31%) and Straits Times (0.09%) all the other Asian indices closed in the red. Jakarta Composite (0.76%) was the top loser.

European indices were trading marginally in the green. US Futures too were trading little higher.


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