Wednesday, January 15, 2014

INDIAN TAX STRUCTURE : Under Review- What are the Options?

The recent statement of Shri Narendra Modi, the Prime Ministerial Candidate of BJP that the BJP is very seriously examining to bring in a more friendly tax structure is heartily welcome. It is important to analyze the current issues and options available before the policy makers to initiate a meaningful public debate.

The present tax structure is seriously suffering from the following major issues:

  • Multiplicity of taxes, especially indirect tax areas consisting of customs, excise duty, service tax, value added tax, entry tax, cess of various kinds, stamp duty and many others. There are around 32 natures of taxes levied by Centre and the State on individuals and businesses.
  • High rates of taxes and cascading effect of all taxes becoming prohibitively costly resulting into tax avoidance, unaccounted transactions, black money generation.
  • Surveys, searches and raids interfering in privacy of public and resulting in large scale harassment and corruption without any material tax collection.
  • Complex tax legislation's further complicated by multiple circulars, notifications, case laws and retrospective amendments.
  • Unreasonable tax provisions, for eg: Capital Gain tax & Deemed Income, based on artificially high Circle Rates & Taxation of share premium as revenue income, etc.
  • Excess compliance requirements, multiplicity of approvals, delay in assessment, refund, processing of applications and delay in various approvals.
  • Litigate approach & lack of faith & trust on tax payers.

It is very heartening to note that a serious examination to review and revise the current tax system is being actively considered by one of the top national level political parties. It is important to have a detailed public debate on this issue so that both UPA and NDA and other political parties can consider this as an agenda item before the new Government.

Single transaction tax: The suggestions to bring in a single transaction tax in place of all the taxes are neither feasible nor workable. The Indian federal structure requires independent taxation sources for Centre and state Governments as per constitutional framework. A transaction tax may result into very heavy tax burden on transaction oriented activities and may result into a very low burden on highly wealthy or lucrative areas, involving lesser number of transactions or transactions made outside the banking mode.

Political parties may consider the following important suggestions:
  • Introduce GST as an alternative to all the indirect taxes, and integrate State level taxes and Central level taxes by providing for a sharing percentage of revenue earned among the State and Centre.
  • A national level bureaucracy can collect these taxes in various States, under the overall supervision of the concerned State Governments. The tax so collected in the Bank can be transferred in a predefined ratio to Central and State Treasuries. Sharing percentage can be based on estimated future cash flows based on current tax structure.
  • The overall impact of direct and indirect taxes outgo at the central level as well as at State level put together should not exceed more than 1/6th (maximum limit being 16%) with concessional rates for certain Goods and complete exemption of priority commodities.
  • It is important to inculcate tax payer friendly approach by the tax collecting machinery so that the assessee can have faith and trust in the system of tax collection.
  • The litigation between the tax payer and the government has to be curtailed significantly with the help of simplified laws, positive approach and education to create an atmosphere of mutual trust and faith.
  • Most of the applications, filings of returns, tax payments, and tax refunds can be made automatic electronically and compliance cost can be reduced significantly.
  • Tax assessment should accept all the tax returns  with scrutiny of a small sample basis to be monitored electronically. The personal interaction between the assessee and the tax officials have to be reduced drastically.
  • Similar to MCA-21 – most of the applications and processing can be done electronically and effectively in a time bound manner and electronic queries can be responded effectively by the tax payer assesses and the tax department.
  • The role of professionals, for example tax audit, tax advisory and tax representation can be more transparent and responsive. The independent professionals should receive adequate respect and recognition in the whole process to ensure creation of an atmosphere of reason ability, integrity and responsiveness.
  • The lower & rational tax rates will ensure better compliance and procedure can be curtailed very significantly. Overall tax collections will be much higher in spite of low tax rates and black money economy will get killed in the process.
  • "Mens rea" should be a must and first criteria for imposing any penal liability in all taxation and other statutes.
  • Magnitude of pecuniary and non- pecuniary liabilities and penalties in various tax laws should be commensurate to degree, size and nature of default and should be risk based. The imposition of minimum penalties and levying them technically in all cases should not be mandated by law and should vary as per fair guidelines.


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