Despite innovative ideas adopted by the CBDT to encourage people to pay their taxes regularly, India has not moved towards a practical and easy tax regime which encourages full disclosure
The Central Board of Direct Taxes (CBDT) has introduced a new kind of form for filing tax returns and form 26AS in anticipation of better tax compliance, wherein form 26AS will now be pre-loaded with information relating to investments as well. With this, the CBDT has given another opportunity to citizens to file accurate and true income returns for the assessment-year 2018-19 by July 31. The CBDT has been scanning computerised records of taxpayers and sending messages via the Short Messaging Service (SMS) and emails to taxpayers who have been found to be remiss in their duty to the nation.
The big question is why is such an exercise needed at all? Despite various innovative ideas adopted by the CBDT to encourage people to pay their taxes regularly, India has not moved towards a practical and easy tax regime where people diligently file their taxes and disclose their true income. We are yet to reach a stage where we, as a society, take pride in filing our taxes and disclosing our actual income.
In view of this general reluctance to pay taxes among Indians, an altogether new tax regime should be introduced without the largely-misused exemptions that we currently have. Why do we need to give two confusing options to taxpayers of either availing some exemptions or getting a flat basic Rs5 lakh as tax-free income? Only the latter option of Rs5 lakh as tax-free income needs to be retained.
The tax system should be further simplified by abolishing cess, surcharges and so on. It is a matter of concern that despite repeated assurances by the Government, the much-awaited, new and simplified Income Tax Act has not been introduced in the country to replace the six- decade-old Income Tax Act of 1961, which is now full of confusing amendments.
The implementation of the Raja Chelliah Committee recommendations to fix the highest tax slab at 30 per cent, to be in tune with most countries around the world, had abolished the practice of converting black money into white money. Gradually increasing the highest slab, as well as imposing cess and surcharges, has undone the good achieved earlier. Hence, the highest tax slab of 30 per cent should be restored so that people find it advantageous to keep their income books honest.
Rather a permanent Voluntary Disclosure Scheme (VDS) should be introduced with a provision for people to declare their income at the highest suggested tax rate of 30 per cent. It could be any income without the taxpayer having to disclose its source.
This will make all cash transactions, especially in property deals, accounted for if registration fee on property deals is also reduced to say, just two per cent, from what it is at present. The names of all those disclosing their incomes under the suggested 30 per cent slab should be on the tax department’s website so that status-conscious people may race to disclose their income.
The basic tax exemption now fixed at Rs5 lakh should pave the way for abolishing all tax exemptions, including on charity, donations, contribution to political parties and even agricultural income. The fact remains that an ordinary farmer does not earn more than Rs5 lakh. And this provision is grossly misused by ultra-rich people, including celebrities to declare their unaccounted income as agricultural income through purchase of some farmland meant for the purpose of evading taxes only.
Income tax slabs should be 10 per cent and 20 per cent for incomes between Rs5-Rs10 lakh and Rs10-Rs15 lakh respectively and thereafter it should be 30 per cent for the rest. The LK Jha Committee recommendations to make the calendar year the Financial Year (FY) too, should be implemented in line with most countries around the world. The fiscal year of April-March is a colonial legacy which was introduced by the British in India for their own interests and convenience.
Rather than concentrating on small cash transactions through BhimApp and so on — which result in frauds perpetrated on illiterate people — all sales and purchases above Rs10,000 should be compulsorily made through bank transactions only. For this to work, transaction charges on credit cards should also be slashed to just half per cent (Goods and Services Tax-exempted). That, too, should be borne by the Central Government, with all incentives on purchases made through credit cards abolished.
Such a system will fetch much higher tax revenue for the Government. The present two per cent transaction charges on credit cards force traders to charge it separately from customers, specially where trade margins are low. Banks issuing credit cards will earn much more even with a half per cent transaction charge because of their increased use. Plus, two sets of credit card swiping machines should be made compulsory for every GST-registered dealer so as to avoid cash payments by those seeking to evade taxes.
The Input Tax Credit system in the GST regime, particularly in the manufacturing sector, is the biggest source of corruption and tax evasion. The GST invoices left out by ordinary customers are sold by traders to manufacturers/producers to avail false Input Tax Credit. Reforms in the Input Tax Credit system can only be possible through drastic changes in the GST tax-structure, wherein basically only two GST rates of 10 per cent and 30 per cent exist, abolishing all other existing GST-rates. Abolishing lower slabs of three and five per cent will be more than compensated by abolishing slabs of 12 and 18 per cent. On the other hand, abolishing the highly corrupt system of Input Tax Credit from the manufacturing and producing sector will fetch much more revenue to the exchequer and it will not harm the manufacturers/producers because of abolition of higher GST slabs of 12 and 18 per cent.
In the same way, a GST of 18 per cent in the service sector is excessively high, where for example those participating in TV panel discussions have to pay roughly half of their honorarium in tax, including GST and income tax. All Government payments can be considered to be exempted from GST to avoid unnecessary Government accounting by putting tax from one Government pocket to other.
Unfortunately, unmindful policymakers brought clutch-plate and clutch-bearing under different GST slabs of 18 and 28 per cent respectively. Likewise similar items sold by confectioners, like sweets, biscuits, savoury items and so on, attract different GST slabs, with diabetes-causing sweets attracting just five per cent GST.
To remove confusion and abnormality, invoices for items like gold jewellery can be drawn in two parts, one for metal and embodied items and the other for making charges so that 10 per cent GST may be payable only on the latter. Cess on extra-luxurious items should be replaced by additional GST slabs in multiples, going as high as 50 per cent in some cases.
The Government must also bring petroleum products under the GST regime to ensure uniform pricing of petrol and diesel in all States.
At present, India is the only country in the world to have so many GST slabs. Zero per cent GST should only be retained on totally unbranded raw materials, which cannot be consumed without giving them a finishing touch, for example agricultural products, fish, meat, cotton, yarn and so on. All items of long-term use like cars, air-conditioners, television sets, refrigerators and so on could attract 30 per cent GST while their parts could uniformly attract 10 per cent GST. In the end, the Government must realise that tax rationalisation on even small things can result in more revenue earning for the Government and turn a country that avoids paying its taxes into one that takes pride in doing so.
(The writer is an RTI consultant)