Tax Reforms

The approach to taxation in rich/advanced nations – may not work here – as we are an emerging nation… long way to go to secure life-basics to half the population here – build infrastructure & support bases – revitalize institutions, regulators, supervisors, watch-dogs etc… (often have over-lapping areas, don’t perform to their full potentials or that of our nation).

Financial & other rejigs remains a major political approach – under political compulsions of populism.  Quota reservation system – meant only for a decade after independence – has tightened its grips – 7 decades and the cries of many more natural groups – as well as mainstream lots – big dent on vitality of crucial fields/domains – prove that the quota system has failed to deliver – served more as a political gimmick to allure vote-banks – at a huge cost to the nation, its progress.

Take Income-tax.  We hear that it will be simplified/reformed – made user-friendly – etc… since years.  What is the crux of the problem?  – Too many rules & regulations, clauses, sub-clauses, some court/tribunal verdicts, etc. are fertile ground for chaos.  A team of professionals can study the efficacy of Income-tax as a whole.  Below taxable income of Rs.5 lacs or for that matter even Rs.15 to 20 lacs (they fall mostly in middle class bracket) – those with above Rs.20 lacs to Rs.1 crore — and Rs.1 crore to Rs.100 crores and the rest being super-rich category (very few)…. Find out the income declared in their annual returns originally — and the rise on tax payable above the original amount, by State intervention – say assessment, scrutiny etc…. for each broad bracket (Below Rs.5 lacs may be a routine system processing).

If the differential – between original declared amount – and the hiked tax liability due to the Dept. intervention & follow up is sizable – the next question is – how much of such hiked tax claims were actually paid – and those pending in appeals and litigation.  This can give a broad picture on efficacy of our tax-management process itself.

If the differential is not much, say below 10% – that accrued to the State exchequer by prudent assessment/scrutiny & follow up processes – is it worthwhile to keep the voluminous tax laws & rules – and also the enormous unlimited powers vested in the Dept.?  Even if it is >10% but below 20% the same basic question remains – with lesser intensity.

Take GST – despite repeated prayers from various quarters – to keep it simple & user-friendly at roll-out stage itself…. we find that complex returns, E-way bills not functional for long periods, scope for more educative/training roles to spread awareness, etc. are big questions.  Higher tax collections – but economy on downward spiral – can’t be a healthy sign.  Center & States slapping additional taxes – cess after cess – v. high taxes on petrol/diesel (consumer pays nearly 3 times the cost price – global oil price crash legitimate-entitlement not passed on to them even in part, nor to the Oil Companies)… keeping real-estate, alcohol – outside GST purview – haven’t augured well for the economy… as the data for last few years reveal.

Govt. made genuine attempts to simplify recently – spurious claims on tax-credits etc. have dampened the vigor to reform.  Yet before reverting back to inspector-raj, due diligence studies – % of fraud claims, etc. involved vis-a-vis total collections etc. are needed.

The thrust area of an emerging economy – that we are – must be on development – rather than on stern tax discipline – it doesn’t mean govt. can allow frauds/evasion to thrive.  Instead of having voluminous laws/rule books – a simplified taxation can augur well for growth & more economic ventures.  Income-tax Dept couldn’t do much on several lakhs of suspicious transactions, etc., treasure of info in their hands – before the demonetization shocker period itself.  The enormity and sheer size/scale of recovery measures of lesser amounts from millions of people would have been a big hurdle.

For both GST & Income-tax – instead of following the approach of advanced nations – we need some out-of-box thinking.  Recently Maharashtra state lowered stamp duty/registration charges on property deals.  It led to sharp hike in property deals which amounts to better revenue (despite lesser rates).  Same analogy applies to Incom-tax & GST too… but it is not that simple, of course.

Why not consider feasibility of levying lump sum tax – for carefully studied income brackets (Income-tax) and turn-over for GST? … Simple returns – less hassles – lump sum payment (upto some high threshold limit) can motivate more tax compliance and help broad-base the tax-incidence.  In such lower/middle-income groups – even if some benefit is retained by the citizens, be assured that it won’t end up as black money or reach tax havens abroad – but more savings & invests on productive ventures can accrue on large scales.  Rare exceptions should not make general rigid rules.

On-line system, attempted reduction in direct inter-face with officials are welcome moves.  But we still have long way to go.  Instead of a huge department, its extended arms, smart hi-tech enabled vigilance apparatus, can smell the rat much better and take prompt action on gross-violators and evaders.

The key to any rapid reforms & simplification approach, vests mainly on the differential figure as indicated before.  Hope it helps while reforming taxation policies.