FactBehindFiction: Simplify tax regime
Jun 20 2014
No politician or tax administrator wants reform as this would make life easy for the common man
The Indian government is no different; it has inherited all the practices of the colonial era. Tax reforms is one such issue, which has been going on for the last 40 years. Some simplification has happened over the years but a lot more remains to be done despite several committees coming out with far-reaching suggestions in as many years.
The first set of tax reforms were mooted by the Wanchoo committee in 1971. The LK Jha committee was set up for indirect taxes by the Janata Party government. Then came the Raja Chelliah committee, which made some concrete proposals in tune with the economic reforms of 1991. Subsequently there was the Vijay Kelkar committee and the now Parthasarathy Shome committee.
Right from prime minister Indira Gandhi’s time, tax reforms have been attempted but they have remained piecemeal. But game changing reforms were attempted particularly in direct taxes during P Chidambaram’s tenure as finance minister when he presented dream budget in 1997. Subsequently finance Yashwant Sinha carried it forward rationalising exemptions during Vajpayee’s NDA government.
Lately two tax reforms measures, direct tax code and goods and services taxes, are considered out of box but they are still far away from being implemented.
Though several changes have come about following the Raja Chelliah tax reforms report, in the field of phasing out of exemptions, a lot of work still needs to be done. The government loses as much as Rs 5.75 lakh crore annually due to exemptions provided particularly to industry and charitable trusts.
The total revenue collections are around Rs 13-14 lakh crore. If these exemptions are done away with, the Union government’s fiscal deficit will be virtually wiped out. But that will never happen because it would do away with rent seeking and the tax system will get simplified providing a level playing field. If this happens, the power that the elite club of industrialists wields, will go away. Tax exemption to a particular industry means that person gets a head start over others as his costs are reduced 30 per cent straightaway as that is what he would be paying as corporate tax in the normal course.
Imposition of MAT on gross profits will makes it difficult for black money generation by the Indian industry. Not bringing agriculture income into the tax net provides yet another opportunity for black money generation.
No politician or tax administrator wants these kinds of tax reforms as this would make life easy for the common man and provide him with a level playing field. Apart from widening the tax base, this sort of simple tax system will also perhaps improve revenue generation.
Today, someone who earns Rs 5 lakh income from agriculture pays no income tax; a professional like a doctor or lawyer pays some income tax but it is much less than small businessmen, who again is better off than the salaried person, who pays the maximum income tax. It is difficult to comprehend why there should be this discrimination and distortion in the tax system. The poor should not be taxed irrespective of his source of income. But why should there be differential rate of taxes for the same income beyond a standardised threshold?
These are issues, which no tax reform committee talks about or looks into. It is because government would then have to look at doing away exemptions in a comprehensive manner.
Rich farmers cannot be taxed as farmers are holy cow. That apart, agriculture income is a state subject. Income from trade or small business leaves lot of scope for avoidance.
The Shome committee that went into reforming tax administration talks of abolition the post of revenue secretary. This suggestion is not new; the Chelliah committee had done the same. The turf war between IAS and IRS officers is age-old. While the revenue secretary is an IAS officer, CBDT and CBEC chairmen are revenue service officers, whose salary structure is different and where promotions too take longer.
The 550-page Shome report argues that by abolishing the post of revenue secretary and allocating functions of revenue department to the two boards, CBDT and CBEC, would empower the tax departments to carry out their assigned responsibilities efficiently. The tax administration needs to have greater functional, financial autonomy and independence from governmental structures, given their special needs. An IAS as revenue secretary is likely to have little experience or background in tax administration at the national level and little familiarity with the tax regime.
One wonders why committees cannot think out of the box and suggest something drastic to make life easy for taxpayers as well as the government. Instead of suggesting some small changes here and there to an already complicated system, it is time that some thorough overhaul is contemplated to the entire tax system in the country.
More than who administers, given the plethora of difficult tax rules and regulations, it is worth considering a simple system of three rates of 5,10 and 15 per cent income tax with no exemptions. Perhaps the government could have a higher slab of 20 per cent for the super rich earning over Rs one crore annually. There could just be a single rate of corporate tax of 25 per cent without any exemption. This would make direct tax administration simple and easy besides ensuring better compliance.
Importantly, tax administration may also become litigation free. However, poor should be spared from paying tax by having a threshold limit. Likewise in indirect tax, introduction of GST with just two rates and a very little exemption will create much-needed unified market and to a large extent eliminate evasion and avoidance.
This may be a utopian situation but it is possible for the government to look at this kind of tax system. Of course, lawyers and chartered accountants might not agree.