JANUARY 01, 2014

By TIOL Edit Team

THE Parliamentary Standing Committee (PSC) on Finance is justified in digging its heels on the issue of tapping the potential of presumptive taxation to widen tax net and enhance revenue receipts.

The Finance Ministry should pay heed to PSC's reiterated recommendation on this issue instead of getting away with wishy-washy stance. It is high time the Government brings out a consultative paper on presumptive taxation.

The Paper should identify areas where presumptive tax needs to be applied, apart from suggesting ways for its effective implementation in areas where it is already applicable.

In a report presented to Parliament earlier this month, PSC has strongly advocated that the ambit of presumptive tax should he widened.

In its action taken report (ATR) on its earlier report on Department of Revenue's (DoR's) Demand for Grants for 2013-14, PSC says: "The Committee find the reply furnished by the Ministry to be rather general and non contextual. The Committee find that presumptive tax provisions were revised only once so far in 2009 and the Ministry have not elaborated on the tax yield arising from this review. Considering substantial growth in small businesses and the self-employed since the introduction of presumptive taxation scheme for certain businesses in 1994, the Committee would reiterate their recommendation that the present Presumptive tax regime be geared up with a view to generating substantial tax through this source and the net of Presumptive Tax should be widened. In the meantime, the Committee desire that the Income Tax Department should prepare a zone-wise list / data-base of all the categories of businessmen, traders, professionals, service providers etc. ,who can be brought under the Presumptive Tax net, depending upon their size / turnover etc."

PSC has been forced to hammer the issue of presumptive tax as it is dissatisfied with the Finance Ministry's reply to its original recommendation made in a report submitted in April 2013.

In that report, PSC had stated: "In the context of tax base, the Committee found that presently there were provisions in the Income Tax Act for levying Presumptive Tax, wherein the concept of ‘Presumptive Tax' has been introduced to bring a number of business and service providers, irrespective of their area of operations, earning substantial income. The Committee however, observed that the existing provisions have not been yielding the potential quantum of tax and would therefore recommend that the present presumptive tax regime be reviewed so that substantial tax is generated through this source, as there is evidently a large number of individuals in businesses, trades, services and professions which are still outside the tax net."

In its action taken reply, Finance Ministry has recalled the changes in presumptive taxation made since its introduction by Dr. Manmohan Singh in the 1992-93 budget. The Ministry contended that "the provisions relating to the presumptive taxation scheme in the Act are continuously reviewed to achieve the twin objective of widening the tax base and for reducing the compliance burden on small assesses."

Twenty years is a long period for review of a globally accepted tool of taxation. Presumptive taxation is extremely relevant in India and other countries where tax evasion and avoidance is a business dharma. It would be appropriate for the Government to study presumptive taxation from all angles and assess its potential to bring to book tax evaders and avoiders with ease.

For the sake of clarity, Finance Ministry should revisit the report of Tax Reforms Committee (TRC) that was chaired by late Professor Raja J. Chelliah. It is TRC's recommendation that led Dr. Singh to introduce presumptive tax on small traders.

In its interim report submitted in December 1991, TRC dealt with the issue of "hard-to-tax"groups such as farmers, self-employed persons, micro and small enterprises, transporters, marriage hall operators, beauty parlours, etc.

Advocating the need for bringing entities that under-report income or completely evade taxes under presumptive taxation, TRC noted that presumptive approach has been followed in the Income Tax Act for several years prior to the formation of the committee.

It, for instance, pointed out that "for a long time income from house property was assessed in the Indian Income Tax on a presumptive basis."The core issue is that presumptive taxation has to go in hand with the taxation of declared income. When it is difficult to verify declared income due to factors such as cash transactions in several businesses, presumptive taxation has to come into play.

There are several approaches to implementation of presumptive taxation in different businesses. Some of these were discussed by TRC. They have also been elaborated in different research papers published at home and abroad. The Government has not tried all approaches of presumptive taxation.

The Finance Ministry must thus ask itself whether it has ever comprehensively studied the prospects of presumptive taxation. If so, it should put in public domain all documents. In any case, there is no harm in studying this subject afresh.

As once put by noted economist Indira Rajaraman, "Presumptive taxation, based on productive indicators, does not involve any departure from the principle of ability to pay. It is not caprice, and it is not a quick fix. Presumption based on consumption indicators, on the other hand, could be a quick fix, but will imply a capricious departure from the principle of ability to pay. The spadework required to establish legally robust presumptive norms based on production indicators is considerable. Once done, the incremental expenditure of time and effort on processing of returns will be greatly reduced."

Presumptive taxation has the potential to become a key driver of fiscal reforms in the country.