Taxation
Economy & Nation Exclusive
Tax Tentacles – 6: Expanding the Tax Net
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
 
You may also want to read…
 
 
 
 
(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.)

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COMMENTS

Yash

2 years ago

The main thing is that in this 60 years or more of the tax system. How much have we tried to educate the masses about the income tax? When one thinks to educate masses about the same a common question is raised that what benefit do we get? Moreover the administration part of the department is a fear among the masses. Like the Swatch Bharat Abhiyan we have to start a huge movement. We can also widen the tax net it the different sectors, business and industries are organised one.

Davidson D

2 years ago

Scrap income tax for individuals completely. Just introduce banking transaction tax of say 3% and whatever credit is effected after deducting 3%, balance can be credited to the account. This would have a huge impact on governments' finances. Withdraw all deductions and exemptions. No filing of tax returns. this would be genuine simplification.

Davidson D

2 years ago

Scrap income tax for individuals completely. Just introduce banking transaction tax of say 3% and whatever credit is effected after deducting 3%, balance can be credited to the account. This would have a huge impact on governments' finances. Withdraw all deductions and exemptions. No filing of tax returns. this would be genuine simplification.

Anil Agashe

2 years ago

You are absolutely right we need to bring many more people in tax net and the successive governments have failed in this.
All small businesses including Panwalas must be asked to pay presumptive tax of say Rs 2ooo per month. They can claim refund filing IT return and these refunds must be processed in 2 months at the most.
I am thrilled that you have talked about interest on savings rates and transferring excess amount to FD mandatorily. I have been saying this for yeas now.I also think small investors who have NIL tax liability should actually be paid 6% interest on their SB balances.

Jung cancels transfers, postings by Kejriwal
Lt. Governor Najeeb Jung on Wednesday cancelled all transfers and postings done by the Delhi government led by Arvind Kejriwal in the past four days.
 
Earlier in the day, Kejriwal wrote to Prime Minister Narendra Modi asking him to let his democratically elected government function independently.

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COMMENTS

manoharlalsharma

2 years ago

Whether KEJRI or JUNG who is powerful an employee of central Gove,or Elected by CITIZENS rep.? let see.

HC seeks Pachauri's response on bail cancellation

Justice S.P. Garg granted Pachauri four weeks time to respond and posted the matter for July 16

 

The Delhi High Court on Wednesday asked TERI director general R.K. Pachauri to file his response on a plea by a woman research analyst who has accused him of sexual harassment to cancel the bail granted to him.
 
Justice S.P. Garg granted Pachauri four weeks time to respond and posted the matter for July 16.
 
During the hearing, senior advocates Ramesh Gupta and Dayan Krishnan, appearing for Pachauri, sought more time to file their response.
 
On Tuesday, the court issued notice to Pachauri and sought his response on the plea by Wednesday while admitting the woman's plea who asked court to cancel his bail.
 
Appearing for the research analyst, advocate Prashant Mendiratta told the court that Pachauri was "influencing" the witnesses in the case and a "free and fair investigation" cannot be carried out if Pachauri is allowed to roam free.
 
The woman alleged that there is "overwhelming evidence" that he misused the bail granted to him by the trial court on March 21.
 
"Even police has filed an application in the trial court alongwith some documents that Pachauri has violated various conditions imposed on him while he was given bail and that he also influenced witnesses.
 
"Police have even said that he was not cooperating with them," the advocate told the court.
 
Mendiratta contended that Pachauri is an "influential man" who has been the top boss of The Energy and Resources Institute (TERI) for the last 34 years and was in active touch with its officials.
 
Pachauri is "dictating what needs to be said to the witnesses" in the case, the lawyer added.
 
The woman also opposed Pachauri seeking modification of a trial court order that bars him from entering the TERI premises.
 
Pachauri, who is facing charges of sexual harassment and currently is on leave from TERI has requested a modification of an earlier court order and permission to resume work from the office premises.
 
"Pachauri now sought modification of order by which he was granted anticipatory bail. He is an influential man. He should not be allowed to enter TERI premises till the investigation is going on," argued Mendiratta on Tuesday.
 
After the sexual harassment complaint, Pachauri had stepped down as chairperson of the UN Intergovernmental Panel on Climate Change (IPCC) in February and proceeded on leave from TERI.
 
He has denied the allegations against him.
 
Citing several SMS texts, e-mails and WhatsApp messages as evidence, the woman accused Pachauri of sexually harassing her soon after she joined TERI in September 2013 and filed a complaint this February.
 
Pachauri was granted anticipatory bail on March 21 but was directed not to not enter the TERI office till the investigation is complete and not to leave the country without the court's permission.

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