Eliminate all exemptions, cut income tax rate to 20%

Updated: Jan 27 2005, 05:30am hrs
Beginning with the reform process in the early 1990s, an interesting partnership has evolved whereby the budget making exercise has become more transparent, views are sought from chambers of commerce and attempts made to remove procedural bottlenecks.

This exercise of pre-budget consultations with various interest groups, including eminent economists, representatives from various industries etc has made the entire exercise more democratic. The annual budget making exercise today is one where one can hope to influence the direction of the budgetary policies and seek to amend the requisite laws so as to promote both economic growth and social equity.

One conjures up pictures of fiscal remedies and corrections in the field of both personal and corporate taxation. Can there be a dream budget where the fiscal laws/policies/rates are a panacea for all ills. There has also been a paradigm shift in the perception that by giving tax exemptions/ largesse to various sectors, the government would achieve its social, economic and political objectives. These tax holidays were used by ingenious planning to avoid taxation altogether. And in some cases also evade taxation.

Hence in todays environment, there is the clear recognition that such tax exemptions/ holidays should be minimised and gradually altogether removed. Nevertheless, fiscal laws are still used as instruments of promoting the social welfare policies and give specific directions to boost to specified industries/ areas. But there is a continuous review of such tax/ fiscal sops to see their justifiability.

In other words, the objective is to see that everyone pays his sovereign dues or everyone is taxed equally and at uniform prescribed rates. The effective tax rate should be the same as the statutory tax rate. Keeping these factors in mind, some of the items on the wish list of a dream budget in the field of direct taxes would be:

Individual income tax rates should be reduced to 20%. All tax exemptions should be removed. The exemption limit should be raised to Rs 2 lakh

Interest rates to be raised for public provident funds as all avenues of savings and social/ old age welfare avenues have been eliminated. The ordinary man is in no position to seek advice from sophisticated fund managers for investing in equities. The ceiling on Public Provident Funds to be raised to Rs 1 lakh

More avenues to create funds/ projects that would suffice to give old age persons regularity, security and easy income to take care of old age. The population the world over is graying, so there is an urgency in providing for a higher population of old / very old persons and less young persons able to service old age

Imposition of tax on agricultural income will prevent tax erosion/ evasion

Removing mobile phones from the one-by-six category for filing IT returns

Need to engender an attitudinal change in the government departments having a larger public interface like revenue and municipal bodies

Accelerated depreciation allowance for research and development

Financing of infrastructure by government-funded bodies to be made more accountable and the tax incentive should be passed on to the infrastructure sector. Need to monitor the progress of implementation of infrastructural projects.

The writer is a tax consultant & advocate