The Hindu : Therapy for tax maladies

Online edition of India's National Newspaper
Monday, Nov 11, 2002

Business

Business

Therapy for tax maladies

The Kelkar panel proposals understand tax reforms not merely as tinkering the present law but as rationalisation of the fiscal system in its true sense, says S. Rajaratnam

THERE HAVE been outpourings of amendments to the direct tax laws from time to time, every such amendment being described as a process of rationalisation and simplification but resulting in more avoidable complications. Even the recent attempt to rationalise relief under Sec. 88 has replaced a flat rate of 20 per cent by four rates of 30 per cent, 20 per cent, 15 per cent and nil rate. Removal of exemptions, incentive deductions and rebates was planned as part of the package of past reductions in tax rates, but lobbyist pressures succeeded in warding them off. Meanwhile, more relief has found its way into the statute books.

The taskforce on direct taxes under Vijay Kelkar has come out with sweeping proposals without much of the paraphernalia of consultations now and confabulations that usually precede such recommendations. No sooner the proposals were made public the tax administration as well as political party activists have reportedly expressed reservations indicating the prospects the proposals may have to face.

These proposals understand tax reforms not merely as tinkering with the present law but as rationalisation of the fiscal system in its true sense.

Personal taxation

In personal taxation, the proposals for removal of standard deduction and incentives for savings by way of deduction under Sec. 80L and rebate under Sec. 88 have to be understood in the context of the proposal for a sizable increase in the exemption limit to Rs.1 lakh, exemption of dividends and long term capital gains on sale of shares and abolition of wealth-tax in conjunction with reductions in tax rates already made in the past.

The proposal to remove standard deduction is bound to raise an outcry from the vociferous salaried segment especially in the context of the proposed withdrawal of incentives under Sec. 80L and Sec. 88 largely availed by this segment. This would put middle level employees with income more than Rs.1 lakh in a worse position, but not worse than other classes of taxpayers in the same income bracket marginally above Rs.1 lakh. State governments, which are beneficiaries of the funds raised through the small savings scheme, are certain to oppose the withdrawal of these concessions and such withdrawals may have necessarily to be phased to satisfy the salaried sector and the State governments.

The removal of savings incentives will bring down the cost of borrowing by the Government occasioned by tax concession or rebate for a class of persons who can probably afford to do without them in a country where the taxpayers below the limit are more than 98 per cent in need of subsidies for the minimum amenities of life, whether it be access to primary education, drinking water, medical relief or a roof over their head.

Corporate taxation

Tax on companies as well as tax on distributed income, whether in the hands of the company or the shareholders, together with the Minimum Alternate Tax (MAT) has been a feature of Indian corporate taxation with the sole justification being easier revenue collections and not on any economic consideration. The present system of corporate taxation is proving to be a major block against corporatisation. It has not been possible to raise resources through the issue of shares for the much needed updating of technology and expansion necessary not only for survival but also for meeting competition in the context of globalisation, thanks to liberalisation.

Removal of MAT, abolition of tax on long term capital gains on equity and on dividend both in the hands of the company and shareholders, besides the proposed reduction in tax rate on corporate income should, among other things, trigger the revival of activity on stock exchanges. The proposed exemption of dividends, which are already taxed in the hands of the company, is a double tax. Collection of this tax in the hands of shareholders enhances cost of collection and occasions enormous paper work, besides adding substantially to the queue of refundees. Exemption will lighten the burden of taxpayers as well as administration. The exemption of tax for investors in a company will prevent diversion of borrowed funds from public financial institutions to intermediaries who now find it profitable to borrow from banks and invest in companies because of the tax deductions available for interest against taxable dividend. If dividend is exempt, interest on borrowing will be disallowed, so that the prospect of such diversion and control of companies by use of public funds is minimised. Tax exemption of dividend will also neutralise the tax advantage for non-residents routing their investment through Mauritius and UAE routes, thereby encouraging direct foreign investment. The recommendation in this regard not only meets a public demand but will pave the way for a major reform by making company shares a more attractive investment.

Broadening the tax base

The proposal to bring agricultural income into the tax net, though beset with possible Constitutional hurdles from State governments, more as a matter of political posture, will be most widely welcomed. The argument that agriculture is badly in need of encouragement and that the new move will come in the way of agricultural production overlooks the higher exemption limit proposed and the fact that the proposal is mainly directed against agricultural income of non-farmers.

Procedural law

There are other equally welcome recommendations in respect of procedural law for expediting refunds reducing reward-induced raids and for better policing of tax compliance, whether it be for charities or others and by networking of information sources. The simplification proposed both in law and procedure will greatly relieve honest taxpayers, while enlarging the number of real taxpayers as against those in the present rolls, wherein one by six rule filers and refundees outnumber taxpayers.

All in all, the proposals are well balanced, the result of a professional exercise, meeting the needs of the economy in general, while by and large avoiding a worse deal for most taxpayers, but at the same time taking care to encourage and enforce tax compliance.

It is an attempt to reconcile the conflicting interests of the taxpayers and the tax collector, reducing scope for corruption and making the tax laws more effective. These proposals require serious consideration and early adoption, subject to whatever modifications that public interest demands. It is only hoped that the reform will be given utmost priority for adoption and that our politicians will not scuttle the proposals.

It is also hoped that tax administrators will cease to be obsessed with short term objectives and will appreciate the benefits from the proposals for the economy. The fiscal reforms as now proposed have been long overdue and can give a direction for the growth of the economy.

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