You are likely to gasp if your grandfather were to sit you down and talk of taxes. Yes, in the 1950s, as much as 98% of our income went towards payment of taxes—wealth, expenditure or income tax.
Better sense has prevailed since then and tax rates have been rationalised over the years. There has been more evidence of this in the 2008 Finance Bill, in which the basic exemption for individuals has been increased to Rs 1.5 lakh from Rs 1.1 lakh (from Rs 1.45 lakh to Rs 1.8 lakh for women, and from Rs 1.95 lakh to Rs 2.25 lakh for senior citizens). The maximum marginal tax rate continues to be 30%.
Over the years, there has also been a withdrawal of estate duty and expenditure tax. Gift tax is now payable by the recipient instead of the donor. Several new taxes have been introduced, such as the banking cash transaction tax, securities transaction tax or even the dreaded fringe benefit tax. Dividend income is today tax-free in the hands of shareholders, even as agricultural income continues to be free.
Still, as Nani Palkhivala said once, “The health of our economy will not improve until we inject the ‘S’ factor into our fiscal laws, and make them Sane, Simple and Stable.” Let us now look at how this S factor can be injected into the present system.
Keep it sane:
The tax laws are not known for their logic. Take, for instance, the fringe benefit tax (FBT), which is nothing less than the expenditure tax coming in through the back door. The FBT’s reach was extended to cover employee stock option plans or ESOPs, although there was a clarification that ESOPs formulated before 1 April 2007 would be exempt from this tax.
If FBT has been recovered from employees with respect to ESOPs, the tax is considered to be paid by the employee in relation to the value of the fringe benefit provided to him. This is to enable the employee to claim such credit in a foreign country; the credit for Indian taxes will also include this FBT component. However, the foreign country has to recognise such unilateral amendments.
If the benefits arising from ESOPs have to be taxed, and I believe it would be fair to do so, why go through such a convoluted route and introduce a mechanism that sticks out like a sore thumb? Why not tax it as a perquisite, as it was in the past, reducing so much distress?
Keep it simple:
File, smile and go. That was an ad campaign run by the tax department some years ago. However, tax forms aren’t as simple as they are advertised to be. The first problem comes in choosing the right form from the plethora available. Further, it appears that new forms keep getting notified each year. Apart from Form ITR 1, which is applicable to persons having only salary, pension and interest income, the other forms are quite long and require elaborate details to be filled in.
Yes, there have definitely been improvements. For instance, direct credit of tax refund to your bank account. But if the refund is stuck, there is no way of tracking it. Perhaps online tracking of refunds will be a reality some day as we are definitely moving towards e-filing of tax returns (now mandatory for companies).
Simplicity will definitely lead to greater compliance and higher collections. The mechanism of online tax filing has been introduced but this facility must be readily available to enable taxpayers to file their returns. Besides online filing, tax returns should be accepted at branches of banks to ensure that long queues at the Income Tax Department are not a deterrent.
Keep it stable:
Of course we expect tax rates to change every now and then, but changing the tax law at the same frequency complicates things for taxpayers. Take, for instance, the stay of demand by the tax tribunal. Such a stay can no longer exceed 365 days from the date that the stay was first granted.
This, even if the taxpayer is not at fault for any delay in disposing of the appeal. In other words, it means easier recovery of high-pitched demands by the tax department. The only saving grace is that this amendment takes effect from October 2008. Then, there’s the fact that if a taxpayer co-operates in an inquiry related to an assessment or reassessment, it shall be deemed that a notice from the tax department was duly served on him and was not invalid. He cannot later claim that no notice was served or that this notice was defective or delayed. While technical in nature, these amendments will have farreaching repercussions.
Stability in income-tax laws alone will result in introducing an element of certainty and trust. If amendments are to be introduced at all, these must be progressive in nature.
—Amitabh Singh is partner, Ernst & Young.
