Justice RV Easwar has done well to focus his report on income tax simplification—the first of many reports—on areas that attract the most tax litigation. So, in the case of Section 14A—“disallowance of expenditure in relation to income not includible in total income”—the Easwar committee points out that it accounts for 15% of all tax litigation. Armed with this statistic, it then asks for various changes in provisions of this section. A fourth of tax litigation, the committee was informed by tax officials, takes place on account of the taxman reassessing cases based on objections by the audit department—use the audit objections to inform future cases, but don’t reopen existing ones is the panel’s recommendation. Similarly, the taxman reclassifying capital gains taxes on shares as business income is a big source of dispute—accordingly, Easwar has recommended that such reclassification be disallowed. Not getting tax refunds on time is another source of heartburn, so this section is to be amended/scrapped. Another big source of harassment relates to high-pitched tax demands, often made to meet revenue targets for the year. In the past, after such demands were made, the income-tax department insisted that at least half the amount be paid upfront while the litigation carried on—the Easwar panel has suggested that this ‘pre-deposit’ be reduced to 7.5%, a figure that is used in the case of customs and excise cases even today.
There are several similar measures aimed at helping individuals and small businessmen. In the case of TDS on interest, analysis by the committee found that 80% of individuals and HUFs getting their tax deducted at source fell in the tax bracket of under 5% whereas the TDS rate was 10%. Since this results in harassment of taxpayers as well as clogging the system since the taxman has to process all the requests for refunds, the committee’s solution is a simple one—reduce the TDS on interest to individuals and HUFs to 5%; threshold limits for the TDS have also been raised to more reasonable levels. The solutions proposed in the case of presumptive tax are also along similar lines. The presumptive tax scheme availed of by businessmen with an annual turnover of under R1 crore is a popular one and is to be raised to a more reasonable R2 crore—more important, since keeping detailed books of accounts and getting them audited adds to compliance costs, it is recommended that this be done away with; if accepted, this will reduce the pain of doing business for small entrepreneurs. A similar presumptive tax scheme is recommended for professionals with a billing—as opposed to “income”—of under R1 crore a year. The presumptive income, in their case, will be a third of the income declared. Since a very large proportion of self-employed professionals do not file taxes, the committee’s view is that a lower cost of compliance will encourage them to file taxes—given how a large number of doctors, lawyers and chartered accountants get away by showing very large expenses in order to avoid paying taxes, getting them into the tax net is critical, though it does look as if the presumptive income of a third may be too high to entice them. Even so, the committee’s recommendations are on the right track and finance minister Arun Jaitley would do well to accept most of them.