It Is Possible To Tax With Love

Updated: Jul 1 2004, 04:37am hrs
Widening the tax base is the panacea suggested by every institution from the International Monetary Fund to the Confederation of Indian Industry. The first step towards this objective is to introduce a new tax code drafted in simple language, having no more than 60 sections comprising the substantive and procedural law applicable to all non-corporate assessees who carry on a business or profession.

New Code
The new code should address the concerns of self-employed persons who yearn for an uncomplicated tax regime. To meet these objectives, a presumptive form of taxation needs to be devised on lines which are at present applicable to some business entities under the Income-tax Act, 1961. Currently, these provisions are optional; thus defeating the very objective. It is imperative to make the new code mandatory with a low flat rate of tax of 10 per cent.

It is estimated that there are 40 to 45 million non-corporate business and professional entities all over India in the 300 and odd cities and towns which have successfully remained out of the tax net by creating multiple units in the names of different family members, taking advantage of the initial exemption limit. A low rate of tax of 10 per cent on income computed on presumptive basis would bring them within the tax net. Small amounts collected from a large universe of taxpayers comprising business and professional entities would double the revenues which the government currently collects from individual taxpayers.

Full Accounting
While reducing the rates of tax, some measures need to be taken which would ensure full accounting of business and professional transactions. All business and professional entities must be required to mandatorily receive sale proceeds, income etc. and incur expenses through account payee cheques or bank drafts or ECS transfers. Therefore, all goods will be sold and services will be rendered for which consideration should be received in the aforesaid mode.

With the Real Time Gross Settlement system being put in place by the Reserve Bank of India, clearance of cheques and bank drafts as well as ECS payments all over India are expedited. Therefore, no hardship or delay will be caused to businessmen and professionals. All payments to statutory authorities at the central, state, municipal and other government levels should be made through ECS mode with direct debit to the bank accounts of the entity. This will stop the misuse of bankers pay cheques in favour of statutory authorities passing through various hands in lieu of large cash transfers.

All bankers cheques/dra-fts/pay orders should be issued only by debit to savings/current accounts of customers who have applied for such instruments.

All business entities should be permitted to have no more than five bank accounts, details of which should be made available to the tax department. A law must be expressly made to prohibit holding of benami bank accounts/fixed depos-it/term deposits receipts or investment in financial instruments, etc.

Existing bank accounts and deposits with banks, and non-banking financial institutions, must be required to be identified and matched with the permanent account numbers of investors by calling for such information from customers. This information must be fed into the Tax Information Network recently set up by the department. For this purpose, banks or non-banking financial institutions may be permitted to outsource the work of collecting the details.

Small Units
Under excise laws, small units having a turnover of less than Rs 1 crore are exempt from excise duty. These exemption limits encourage persons to set up multiple business entities in the ame of their family members so that each entity generates a turnover which is within the exemption limit.

Therefore, a minimum tax at the rate of 10 per cent under the IT Law and 1 per cent by way of excise duty under the Excise Law, without any initial exemption, would discourage creation of multiple business and professional units, making persons liable to tax at rates that are perceived to be acceptable. Such low rates would also encourage persons to disclose their full turnover and profits.

Other measures which may be considered to cover the self-employed sector are:

A minimum tax of an average amount of Rs 18,000 p.a. should be payable by every business or professional entity which owns or uses any office, shop or room having an area of more than 15 square metres. In other words, even if a businessman claims that he has made a loss, the minimum tax should be payable. In India, there are lakhs of sick industrial units, but their owners are financially prosperous.

The other alternative would be to consider 5-10 per cent of the turnover of every business enterprise and self-employed businessmen to be the taxable income. Tax would be payable on such deemed income without going into the question of allowability of expenses and deductions. The tax and excise departments should concentrate on the determination of the true turnover of a business enterprise, as that would help recover the correct amount of excise duty and income-tax.

In the case of professionals, an average 30 per cent of the gross receipts should be deemed to be their taxable income, the actual percentage varying from profession to profession, which could be prescribed in a Schedule to the Income-tax Act.

Taxpayers are not averse to meeting their tax obligations. What they expect is certainty of the quantum of tax that they have to pay without any dispute or litigation. Further, the procedure for payment and assessment should be simple. Once these are addressed, taxpayers will readily fulfill their obligations. It is certainly possible to tax with love.

(To be concluded)

Tomorrow: Avenues For Recovering Revenues