There are obvious advantages in adopting the idea of diverting income at source or even in making the bank as the account keeper and remitting the tax after a proper assessment. This is the concluding part of the seven part series on tax reforms
Every taxation system basically pre-supposes the taxpayer’s willingness to pay taxes, to have an accurate book keeping behavior and to calculate their taxable income based on objective data. It is obvious this is too much to expect and the consequence is only a hostile department, which is unable to accept any statement without suspicion. Therefore, what is required for honest taxpayers is, help from the government to maintain clear financial data by a record-keeping system and a receipt and expense statement system. Now we have the technology to get the banks to act as the account keeper of individuals and provide an annual balance sheet. Japan has initiated the plan to help taxpayers to maintain accounts
In the US, the National Taxpayer Advocate had proposed the general concept of IRS to generate tax returns for individuals who volunteered to be covered by the system on the basis of (1) income reported on information returns and (2) information on filing status and dependents provided by taxpayers on a new simpler tax form. IRS would then mail the returns and refunds or tax bills to taxpayers, who would need to review their returns
and notify IRS whether they agreed with the return information
. However, I was surprised note that this proposal did not find favour with the Technology Policy Institute
However, several revenue bodies (i.e. Chile, Denmark, Finland, Malta, New Zealand, Norway, and Sweden) provide a capability that is able to generate, at year-end, a fully completed tax return (or its equivalent) in electronic and/or paper form for the majority of taxpayers required to file tax returns. Three bodies (i.e. Singapore, South Africa, Spain, and Turkey) achieved this outcome in 2011 for between 30-50% of their personal taxpayers as reported by OECD
. UK has an office of Tax Simplification
and an ongoing project for creating a simpler fairer system
. UK also considers corporate tax as a separate item streamlined to invite investment
WEIRD (Western, Educated, Industrial, Rich and Democratic) people need not be the only models. We can develop our own model if we can analyse the data intelligently.
There are obvious advantages in adopting the idea of diverting income at source or even in making the bank as the account keeper and remitting the tax after a proper assessment. In short, tax the source and not the person and benefits are plenty. These are…
• Financial transactions are transparent and fully recorded in the bank accounts.
• The tax is paid through the bank account of the taxpayer only
• Status of the taxpayer will be irrelevant
• No chance of generation of untaxed income
• Uniform rate of tax and everyone contributes to nation building
• Unorganised sector is organised through bank accounts
• Expands base instead of squeezing those already in the net
• Rebates possible through selection of transactions to tax
• No computation or complicated calculation involved
• There will be no gender bias. At present income derived on asset transferred to spouse is added to the income of the spouse to levy a higher rate of tax on his income. This really affects the husband who is considerate enough to provide funds to a non-working wife. If the income is taxed at the source this situation will not arise.
Not making criminals of citizens for inadvertent omissions. For example everyone is expected to apply for a PAN number and if it is not allotted [which is the duty of the Income Tax Officer] the taxpayer will be penalised
Only contra I can think of is the agency problem
, which is already there. Remember the free pizza offer, if there is no bill. It is not a gift but just to make the customer as the shop supervisor! Businesses, which act as the tax collector may pay salary in cash outside the account to avoid TDS. However, when the business itself is made the assessee to pay the salary distribution tax, it would not be worthwhile for them to do that as the deduction of salary in computing their income will be affected. There are legal strategies to deal with this
More importantly these changes can be made without the need to throw out the present Income Tax Act. All that is needed is to make a few amendments. Sections similar to 115-O have to be enacted to cover salaries and interest. Reference to status can be omitted. Provision has to be made to strengthen the assessment of business income as a separate source and for registration of the business units. This has to be based on evidence. The present return forms
themselves distinguish the steams of income and so it should not be a difficult task to isolate business incomes for focused treatment as in UK
Governments around the world are grappling with ambitious transformation agendas, Finance Ministers delight in manipulating the financial behaviour of taxpayers by changing tax rates. Governors of central banks wish to control borrowing behaviours by changing interest rates. People do not even budge to keep their surroundings clean without a nudge. We now have toolkits
of behavioural science to reinforce social norms and behaviour.
The transformation invokes two metaphors - one who tries to extract something forcefully from a cow and another who milks it, leaving most of it for the calf. Can we transform the butcher into a milkmaid?
There was a dairy farmer who was concerned about the drop in production of milk in his cattle farm. Therefore, he went to consult the ultimate resource: a theoretical physicist. The physicist listened to his problem, asked a few questions, and then said he would take the assignment, and that it would take only a few hours to solve the problem. A few weeks later, the physicist phoned the farmer, "I've got the answer. The solution turned out to be a bit more complicated than I thought and I'm presenting it at this afternoon's Theory Seminar". At the seminar, the farmer finds a handful of people drinking tea and munching cookies - none of whom look like a farmer. As the talk begins, the physicist approaches the blackboard and draws a big circle. "First, we assume a spherical cow...
". I hope you do not think that my idea is just like that - a spherical cash cow sans tentacles!
(This is the concluding 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)
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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