Every time the I-T department talks of widening the tax base, they end up only squeezing those already in the tax net. Can we think about new, fresh ideas to widen the tax net?
To put first things first, we have to keep in mind that our economy is predominantly a cash economy. There is so much talk of black money that we tend to forget that most people have only cash and no bank account and it cannot be said that all money is black. Even if it were, Gunnar Myrdal
said that it works as a lubricant in soft economies. Every time the department talks of widening the tax base, they end up only squeezing the people already in the tax net.
In the 1997 budget speech, the Finance Minister stated: “It is inexplicable that in a country of over 900 million people, only 12 million people are assessed to income-tax and, what is worse, only about 12,000 assessees are in the tax bracket of income above Rs10 lakh.” In 2012, a temporary 10% surcharge was applied to people with annual income of at least Rs1 crore and it covered only about 43,000 people
. Citizens meeting two out of six economic criteria such as ownership of car or house had to file returns. Similarly, a new Estimated Income Scheme was introduced for retail traders
. We have no information about the effectiveness of these methods to gather data.
The Tax Administrative Reforms Commission reported on 30 May 2014, “the complete absence of economic, statistical, behavioural, or operations research-based analysis of policy or of taxpayers prior to making major or minor legislative or subordinate legislation-based (rule-based) decisions: Administrative decisions and tax policy making are both based on nil analysis by international standards. No ‘impact assessment’ is carried out before introducing major legislative changes. Even changes in rules that Boards announce have no reference to what background analysis has preceded the decision. Pre-budget discussions are usually back-of-the-envelope calculations of revenue impact. The impact on a taxpayer is considered in a cursory manner, if at all. Retrospective amendments clustered during 2009-12 may reflect this lackadaisical approach. In turn, this reflects complete lack of accountability at any level except on grounds of lagging behind in revenue collection.” It recommended giving prefilled returns, which the taxpayer can accept or modify to simplify the process.
As my mentor used to say, it is easier to deal with the organised sector than the unorganised people unless there is some way of getting them organised. That was one of the ideas in progress that we used to discuss in Guwahati. We should also keep in mind that money is actually stored energy and is released only when used. Just keeping cash in the strong box is of no use until it is spent. Only when it is actually spent and gets into circulation does it release energy by activating to people to do things that are needed to be done. The next level is when the money is kept in a bank because the bank makes it work by granting loans based on those deposits. People have to be educated that keeping their money in the bank is itself a great service to the nation.
What better way to organise people than to encourage them to open bank accounts. In a recent initiative of financial inclusion, the government has a project to see that every individual has a bank account
. I am happy to say that this was one of the ideas of Justice S Rangarajan, shared with me 40 years back. If every account is linked with a PAN Card, the department gets a huge databank. However, without incentives, it is not possible to achieve this target. The recent initiative is to give accident insurance for Rs1 lakh as well as life insurance for early birds
Exemption from income tax can also be built into this by making all saving bank interest tax free but putting a ceiling of Rs30,000 and compulsorily transferring the excess to FD accounts. The Income Tax (I-T) Act gives an exemption of Rs10,000 on savings bank interest and this can be embedded this way in the account itself and at 4% every account holder will have a minimum tax free income of Rs1,000 per month. This will also create a safety net when life insurance is also embedded in it. There is also the added advantage of KYC, which can be used to eliminate duplication. If we have uniform rate of tax on interest, duplication of accounts will not affect tax collection.
The idea of distribution tax on salaries and interest will remove the mismatch between deduction of tax and tax liability. It will also reduce the cost of compliance, because the compliance will be limited to the liability of the employer or the creditor and the requirement of their giving TDS certificates can be dispensed with. The credit voucher and bank accounts will show how much of the remittance is diverted to the Government as tax and the assessment will be on the remitter.
In the alternative, in case the total income concept cannot be abandoned, the point of deduction of tax can be shifted to the accounts of the recipient, instead of the remitter. The banks can be instructed to freeze 10% of all remittances in the accounts of every individual and at the end of the year, based on the public profile of the individual, the income tax payable can be assessed and deducted from the frozen amount and the balance either released or collected depending on whether the tax is less or more. This process removes many hassles such as mismatch between taxes due and deducted, cost of compliance by third parties in respect of tax liability of the individual, payment of advance tax and payment of interest on tax due or refunded. If the process of easy collection of taxes is to be outsourced it is better to use the banking system than the assorted group of remitters.
(This is sixth part of a seven-part series on the vexing Indian tax system and the path to genuine reforms, adapted from Justice S Rangarajan Memorial Lecture in Bangalore delivered recently)
Tomorrow: Concluding Part: Tax the source and not the person
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(Justice TNC Rangarajan is a former judge of Madras and Andhra Pradesh High Courts. Earlier, for more than 20 years, he was a Judicial Member of Income Tax Appellate Tribunal