Union Budgets are an up and down exercise. Certain tax rates are raised and some others lowered. There is often not too much innovation in the exercise.
For instance, personal income-tax works on a slab system, with step-up rates. This acts as a disincentive to earn more or offers an incentive to avoid or evade. Further, the current slab range is narrow, making the practical rate of tax at 30 per cent plus applicable surcharge.
The tax slabs
With the changed circumstances, the slabs must be revised thus:
Income up to Rs 3 lakh: Nil tax; Rs 3-20 lakh: 20 per cent; and Rs 20 lakh to Rs 2 crore: 30 per cent. Beyond Rs 2 crore, the rates must shift to reverse gear: 25 per cent for income from Rs 2 crore to Rs 10 crore. And beyond that, 15 per cent. This should not only incentivise a person to earn but also to declare the real income. This will keep money from flowing out of real into grey economy.
Though the Government has no business to be in business, it should approach tax management by applying general business principles of making customers happy even while collecting its tax. It is imperative to offer tax discounts to corporate assessees, which pay about 34 per cent of their taxable income as tax. Any corporate assessee declaring taxable income greater than 20 per cent of the previous year's figure can be taxed for the excess income at a discounted rate, say, 10 per cent discount to the normal rate. If the excess is greater by 50 per cent, the discount may be 20 per cent and so on.
The Finance Minister must also consider getting rid of the carry forward and set off provisions of losses. Instead, the loss declared by a corporate can be assessed and tax refunded at a flat discounted rate of 20 per cent of the assessed loss, within six months of filing the return. This should be subject to the condition that the assessee has a tax credit in his account and the refund does not exceed the available tax credit at any point of time. An assessee can be allowed to accumulate tax credit at 20 per cent of the taxable income declared in a financial year, up to five financial years.
It is time the special rates of depreciation and the block method of computing depreciation for tax purposes were done away with. The depreciation rates should be the same both for tax and the company law purposes. However, there is every need to thoroughly modify the depreciation rates under the Companies Act, keeping in mind the special features of different business/industry segments. Industry-wise depreciation rates must be created. With the depreciation rates made industry-specific, there would be no need to have two methods of computation, and the globally accepted Straight Line Method can be adopted both for financial accounting and tax purposes.
Further, where an asset is disposed of at a value higher than the depreciated value, generally termed the book value, the excess can be charged to tax under business income whether or not the sale price exceeds the original purchase cost.
After switching to a uniform method of depreciation (the straight line method) and by keeping the rate same both for financial accounting and tax purposes, the Minimum Alternate Tax (MAT) can be done away with if tax computed under the provisions of the Income-Tax Act is lower than that tax payable under MAT, wherein tax is payable on the book profits at 10 per cent plus the applicable surcharge and the education cess.
Short-Term Capital Gains
There is a considerable controversy in treating income from purchase and sale of shares within a period of one year. The question is when there is a continuous purchase and sale of shares by an entity, should the income arising from such transactions be taxed as normal business income or as short-term capital gains, which is subject to a concessional rate of 10 per cent. Instead of prescribing a complex and subjective procedure, income from sale of shares within three months of their purchase must be deemed arising from business, and in other cases it should be treated as a short-term capital gain.
Excise Tariff Rates
With the rates of excise being rationalised into zero per cent, 8 per cent, 16 per cent and 24 per cent, and with the facility of getting Cenvat, the Classification of Excisable Goods for duty purposes under the Excise Tariff Act is becoming less relevant. So, is it really necessary to have a voluminous Classification of Goods under the Excise Tariff Act running into 91 Chapters and about 1,000 Tariff Headings and 2,000 sub-headings describing various categories of goods subject to different rates of duty?
The Excise Tariff Act can be greatly simplified by specifying the goods which are subject to zero per cent, 8 per cent and 24 per cent duty rates and by stating that all other goods would attract 16 per cent. The point is that the goods subject to the latter rate are few. Indeed, most VAT Acts of the States have adopted this method.
N. Syamasundaran (The author is CEO, Right India Consultancy House, Bangalore.)