Recently an actor tweeted about the cost of bananas at a five-star hotel. Tax authorities were quick to fine the hotel and issue a show-cause notice. If the hotel in question does not sell bananas, only fruit plates, and the actor requests for bananas, the person serving is obliging the actor by customising the fruit plate to only have uncut bananas.
However, since the hotel does not sell fruit, they can only charge him for the fruit plate which invites taxes as recorded. The actor, therefore, is deemed to have accepted this arrangement. In such a case, the fine imposed on the hotel and the show-cause notice can be quashed. In the process, however, the hotel would still incur legal expenses and other costs.
However, examples like these raise many fundamental issues.
Tax System Is in a Mess
A five-star hotel with high-end IT systems should not be levying inaccurate taxes, though smaller establishments fall victim to complications. A variety of goods and services are sold in any single establishment. If each of these goods is going to be taxed at different rates, there is bound to be confusion.
Some people are taking advantage of the tax confusion to cheat the public. The cheating happens at two levels—consumers are charged a price that is different from that indicated on the MRP label and are charged a different tax rate than applicable. It is practically impossible for consumers to figure out the discrepancies in the bill.
GST (Goods and Services Tax) mechanism protects the interests of the government by daisy-chaining tax credits across the supply chain. But consumers receive no such protection. A government that looks out only for itself creates scope for burdening the public even more.
Income-tax is equally complicated. There are far too many exemptions and people are taxed far too much. First, there is no need to differentiate between different heads of income – income from property, salary, etc. Similarly, there is no need to differentiate between long-term and short-term capital gains.
To add to this mess, the finance minister has made corporate social responsibility (CSR) spending mandatory. Thus, it has, indeed, become a tax with a different label.
Enforcement State Vs Compliance State
Illogical discrepancies in tax policy create difficulties in compliance and result in corruption. Add to this mix, a trigger-happy tax department facing stiff targets, the situation becomes a nightmare for tax-payers. The taxman thinks of himself as a hunter looking for potential tax evasion. But what he is looking for are discrepancies which have been baked into the system. This mess is the government’s own doing, a result of running an enforcement State. Enforcement State presupposes the citizens’ guilt. It is not meant to rule upon the subject, nor to serve the people. This approach is not limited to tax but to all government departments.
Instead, government should run a compliance State where complying with the law is simple and easy. Breaking the law or evading taxes should be difficult. High penalties are justified if you run such a compliance state.
Thankfully, it is possible to tax simply and properly without creating disenchantment amongst the taxpayers.
Principles of Simple Taxation
Tax should not be an instrument of policy. Promotion of policy objectives must be separately accounted for. This simplification allows for clarity in nature of government revenues and spending. A tax credit is actually government-spending that promotes certain objectives, but the same it gets masked in details. The quantum, effectiveness and accountability of such quasi-spending is difficult to grasp. A better way is to give direct benefit transfer to the target beneficiaries.
Tax calculation needs to be simplified. But how simple is simple? A fifth standard student should be able to compute the tax liability. For GST, one rate should cover all goods and services. To impose penal taxes, for example, on cigarettes, tobacco, etc, those should be levied at source and not at consumer end.
Subsume the cess and other add-on taxes into the main tax. Complexity should be handled at the back-end and tax-payer should be presented with simple numbers. The governments, state and Central, can get 17.3456% and 2.6544% revenue, respectively, for a 20% share. Governments can handle that complexity. It is difficult to compute 34.5% or 18% of the value of the goods/services. Income-tax has cess, making it an odd number.
Multiple taxes on items should be avoided. Taxing profits and dividends does not make sense. Thus, wealth tax too is a bad idea.
Advance tax should be abolished. Government is the most credit worthy institution in any country. It should be able to spend and collect the dues from the citizens subsequently. The advance tax is an unnecessary imposition on the taxpayer.
Corporate social responsibility (CSR) should be renamed as social tax and be levied transparently. Keeping it under this escrow scheme does more disservice to the taxpayer than the rate itself.
Today, a citizen is taxed by multiple governments (city, state and Centre), through various channels (direct and indirect) at different frequencies. This government-centric approach should give way to a citizen -centric approach. Every person should receive one bill for direct taxes including for property taxes, income-tax and other taxes.
Tax return filing should be very simple. Even the Saral form is too complicated. All it needs is income and capital gains. There is no need to give any credit/exemption, etc. for any reasons.
In Sum
Government should quit looking for wealthy people and invent ways to tax the money out of their pockets. Instead, it should spend wisely, provide services that benefit the citizens and seek a small portion of those benefits. More than, 2,000 years ago, Chanakya had explained that government should collect taxes just as a bee collects honey from the flower. It is unfortunate that the government that claims to be aware of India’s cultural roots has forgotten one of its finest expositions.
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The writer is advocate, Bombay High Court, and has counselled Fortune 500 companies, public and private sector banks, hedge funds and private equity funds. He has previously worked with Aditya Birla Group, CRISIL and Morgan Stanley. He is the author of two books – Subverting Capitalism and Democracy and Understanding Firms
. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.)
The worst thing is that it is our courts that make a mess of a worse situation. The Sabarimala verdict of the apex court was a blatant violation of Art 26 of the Constitution. If at all it had to tinker with the constitutional provisions it was Art 25(2)(b) that it should have amended. And this is not an isolated instance. In fact our justice delivery system has been reduced to legalizing the whims and fancies of our judges.
The RTI Act is a very simple, unambiguous law, as any law should be. But apart from the information commissioners who have subverted it (again taking advantage of the failure of the judiciary to deliver justice in time and conforming to the mandate that justice should not only be done but seen to be done!), it is the judiciary who is responsible for this law also going the way of other laws-implemented selectively by our authorities including judges. The case of the judges assets is too well reported to need recapitulation here. And for god sake, can anyone please clarify why judicial proceedings have been kept out of purview of the RTI Act by the competent authorities, the chief justices of our higher courts, who have frame the Rules?
In the '90s I once heard a story when I was in Singapore (I don't know if it's true). Lee Kuan Yew, the first Prime Minister of Singapore made tax compliance in Singapore so easy that one could file returns over a public phone on a toll-free number using an IVR (interactive voice response) menu within minutes. The irony, I was told, Lee Kuan Yew hired a well-known Indian IT company to design their compliance system.
I have another fundamental question to ask taxation experts. Why should India need both income tax and GST (consumption tax) to co-exist? If the purpose of earning income is to ultimately spend on goods or services, why tax both ends of the pipeline? Either tax the input (income) end or the output (goods and services) end of the pipeline. I can't imagine anybody earning income perennially without spending on anything.
Taxes? The answer is simple. The ever hungry and greedy Indian State can never have enough to feed the profligacy and obscenely luxurious life styles of its burgeoning Politician, Bureaucrat, Police, Judiciary and Crony Kleptocracy.
So, the Government is always seeking fresh avenues to steal from the “haves†for the “have lots†in the name of the “have notsâ€. “Corporate Social Responsibility†is one such ploy.
This is an incremental extension of the redistribution of wealth and opportunity through “Social Re Engineering†i.e. the Quota (Reservations-License) and Corruption (Extortion-Scam) Raj that has masqueraded as governance since 1947.
Today exclusive air conditioned blocks have been built for Politicians and Bureaucrats to receive free treatment from upper caste doctors and nurses in Government Hospitals while the poor have to pay bribes to receive surgery without anesthesia and wallow in the pig sty that the Indian Rapeublic has made out of what used to be fine Maharaja and British made hospitals where the same quality free treatment used to be meted out to all. Poor or rich. This despite the first law that Modi made which was a Khangress bill to send Neta-Babus abroad for medical treatment at my expense.
Many Indians have learned NOT to donate to traditional charities such as Tirupathi and other Nationalized Temples which will only be misused and abused as Government itself is certainly no Sat Patra and is, Constitutionally, the embodiment of Adharma and evil. Therefore, the “For government, by government, to government†Indian State wishes to raise more and more taxes by different names such as CSR to do what it does not have the will and ability to do beyond pampering itself.
It is interesting to note that in an act of “Land Grabâ€, the Karrinayithikka Government i.e. Neta-Babus recently stole the National Association for the Blind, a valuable piece of Real Estate in Indiranagar, Bangalore. It began with “sanctions†like those the US applied on Iraq by freezing all accounts and throwing it into the limbo of India’s rapacious, inhuman, alien, immoral judiciary. The inmates, blind children all, were left completely orphaned with not even food, clothing, electricity, water or education. But for Akshayapatra which responded to alerts from concerned neighbours, the children would have starved to death. Elsewhere in Indiranagar you have the privately run Shri Rakum school for the blind (residential) founded by a martial artiste. This runs entirely from donations. Many of my overseas cousins when visiting their relatives in Indiranagar make it a point to donate sacks of rice and pay for festive feeding for all the children during birthdays and anniversaries. Much smaller than the “National Association for the Blind†which is now a nationalized fiefdom of influential looters, the Rakum school hosts far more children and keeps them happy. I mention this to emphasize the point that the Indian State exists exclusively for the personal pelf, pleasure, pomp, perversions and perpetuation of leeches and bed bugs such as the Politician, Judge, Bureaucrat, Police, Crony Kleptocracy and NOT for the needy people of India.
Toll rates, for example, are based on “what the market will bearâ€.
The basis is that if Non VIP Citizens want to enjoy a luxury called “roadsâ€, they must pay for it .
(i.e. conveniently negating the Government’s responsibility to utilize the money it loots from us in the form of taxes, deficit finance, inflation and so on, in a prudent manner so as to provide us with sound infrastructure. This used to be taken for granted before 1947 and continued, albeit with progressively deteriorating road conditions, reflective of the galloping corruption, till 1988 when Rajiv Gandhi decided to increase the plunder for the Kleptocrats and created yet another PSU known as the National Highway Authority of India.)
This is to say, the basis follows the same principle as taxation in India which is to steal as much as possible from the Non VIP citizen for the benefit of the VIP citizen. For example, the politicians, bureaucrats, police and judiciary are exempted from paying tolls because they own the British Empire that has come to be known as the Indian Rapeublic since 1949. They have separate VIP by passes to toll gates! Which, in effect, means that they are looting money from the Non VIPs for the luxury of a “road†which is but a free essential to the Kleptocracy.
Remember the Bangla Desh relief stamp of 15 paise that had to be applied on post cards costing 10 paise in 1972? The stamp was removed by merging the additional cost into the original cost which is to say, Post Cards were raised to 25 paise and the Bangla Desh stamp was removed. So Bangla Desh liberation became an excuse to render a postal hike of more than 100% acceptable to the people of India and then became permanent. This is exactly what happens to every form of expropriation of money from the Non VIP public for the exclusive benefit of Government and to maintain its Satraps and Nabobs in obscene luxury like medieval barons lording it over the abysmal, inhuman life styles of their serfs, the Non VIP citizens.
So, as tolls are an addiction of India’s Kleptocratic Government, tolls will go on forever. Like “reservationsâ€.
This reminds me that, even until the 1960s, the Highways, Roads, Hospitals, and Corporation Schools established by the Maharajas of Mysore before 1947 were not only free but excellent. It was only after the 1960s that the Indian National Congress applied the tenets of the British Empire on the newly conquered and subjugated Mysore State and began to plunder it for the benefit of the Mughals like Nehru and his gang of thugs sitting in Delhi.
Essentially, India’s realty business was, next to agriculture, India’s biggest Money Laundering economic segment. It was almost as heavily dependent on black money from Netas, Babus, Cops, Milards and other criminals as Bollywood for staying afloat.
When this rug was pulled in the form of taxes, demonetization etc. the many PONSI developments where developers had taken money from investors and had left projects hanging while grabbing more money for fresh projects hit a wall. The resulting collapse had a domino effect with impoverished investors, incomplete projects locking up enormous amounts of infructuous capital and developers without any recourse to essential funds to complete pending projects. Simultaneously the demand for real estate collapsed.
Black money is back in circulation and corruption is merrily on the rise again but this has not been able to unlock the enormous amount of locked up capital or help the impoverished investors.
Modi Sarkar Policy is not addressing this issue holistically or knowledgably. Just as in the case of Agriculture, the Neta-Babus expect the ordinary Indian citizen and the industry to recover somehow on their own as the Neta-Babu-Cop-Milard-Crony Kleptocracy are not in any personal difficulty and whatever losses they have suffered are easily made up by abuse of power and extortion now with the legal support of Modi’s so called “anti-corruption†law.