Shift tax reforms from talk mode to action mode
DECEMBER 10, 2014
By TIOL Edit Team
The urge and the need for tax reforms in the country is hogging the limelight. The Finance Ministry last week decided to implement a five-month old budget proposal to set up a High Level Committee to interact with trade and industry and ascertain areas where clarity on tax laws is required.
Setting up a committee, even belatedly, is an easier job as compared to implementing any panel's recommendations. It is thus not surprising to find that Modi Government has refrained from disclosing its mind on three reports of Tax Administration Reform Commission (TARC). TARC's third report, released last week, is packed with both new and old suggestions.
Before discussing TARC's recommendations, one should not overlook Modi Government's generic commitment to G20 Summit recently held at Brisbane. In its 'Comprehensive Growth Strategy: India', the Government resolved that it would ensure "predictable and stable tax regime."
To honour this commitment and its resolve for tax administration reforms, Modi Government should shift gears from talking about tax reforms to acting on tax reform proposals, both latest and old ones made by different entities including comptroller and auditor general (CAG).
The public is gradually discovering that NDA Government is reluctant to launch politically risky reforms as indicated by Finance Minister Arun Jaitley repeatedly by harping on political consensus. The Prime Minister Narendra Modi has lately sung a similar tone by suggesting that reforms should be delinked from political process. The ground realty is that most of the tax reforms proposals are politically non-controversial or at best might attract token criticism from the Opposition just for the sake of opposition.
Yet to make the task of Modi Cabinet easier, the Finance Ministry officials should split taxation reforms into two- political sensitive and politically neutral.
Modi Government can defer taking call on sensitive ones such as renouncing categorically retrospective taxation and bringing rich farmers into tax net as recommended by TARC in its latest report.
It has proposed that farmers with annual income above Rs 50 lakh should be levied income tax. As put TARC, "Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenues annually."
It has suggested that "States could pass a resolution under Article 252 of the Constitution, authorising the Centre to impose tax on agricultural income. All taxes collected by the Centre, net of collection costs, could be assigned to the states."
Going by past experience on this proposal, one can safely assume that all politically parties including the ruling alliance would join hands to prevent levy of tax on rich farmers' income.
Similarly, the Government need not act on TARC's latest recommendation to reintroduce fringe benefit tax (FBT) and Banking Cash Transaction Tax (BCTT). Trashing of these two recommendations would help NDA Government demonstrate that it is committed to its resolve to make tax regime predictable and stable.
In its 3rd report, TARC claims that reintroducing FBT would be an effective measure to widen the direct tax base. It believes FBT can become a good temporary administrative measure for enhancing tax collection.
As for BCTT, it notes that there is no instrument at present that captures details of cash withdrawals from bank accounts, other than savings accounts. The availability of such information would help the I-T department widen its information base on the use of black money since excessive cash withdrawal can help it understand the extent of the cash economy.
TARC says: "Hence, Rule 114E of the IT Act should be suitably revised to include in its ambit cash withdrawals exceeding specified amounts in a day from bank accounts other than savings accounts. Alternatively, BCTT should be reinstated as an effective administrative measure."
Mr. P. Chidambaram, as the Finance Minister, introduced BCTT in June 2005. He himself scrapped this levy in April 2009. A little over two months later, his successor Pranab Mukherjee abolished FBT as well as Commodity Transaction Tax (CTT). Both these imposts were introduced by Mr. Chidambaram.
As for politically neutral or non-controversial reforms, it makes a lot of sense to accept many TARC recommendations and implement them promptly. A case in point is its suggestion to introduce the periodic regulatory impact assessment of taxation measures to improve decision-making process.
Mr. Jaitley should also accept TARC's recommendations on broadening the tax base as a healthy challenge and opportunity to raise resources for inclusive growth.
As put by TARC, "Tax base and taxpayer base expansion are crucial factors affecting the growth of tax revenue. Currently there is a perceptible gap between the potential and the existing number of taxpayers. The taxpayer base could be almost doubled to six crore taxpayers from prevailing levels. The focus has to be on bringing in new taxpayers and targeting sectors that remain under-taxed or untaxed. It has given rise to a large cash economy which comprises mainly the unorganised sector that tends to include small businesses, as well as high net worth individuals. This requires policy as well as administrative and enforcement actions."
Mr. Jaitley has had adequate time to firm up his Government's stance on politically non-controversial reforms including scaling down of tax expenditures/preference. He can package tax initiatives as big-bang reforms in the forthcoming budget.
The tax reforms bucks stops at Mr. Jaitley's door.