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For a more equitable tax regime
February, 16th 2008

With Budget 2008 less than a fortnight away, there are suggestions galore for improving the tax administration, widening the tax base and giving more relief to taxpayers. Taxing agricultural income has always been a sore point, with policymakers divided over exempting all forms of agricultural income. Even the levy of capital gains tax on transfer of agricultural land is restricted to the location of the land within 8 km of a municipality.

Farmlands are being sold to real estate developers for development of residential colonies, resorts and farm houses. Even if agricultural income is not brought within the tax net, there is a need for widening the compass from the present 8 km to at least 30 km from the municipal area.

Presumptive Tax

Tax deduction at source (TDS) accounts for a substantial part of the total tax collections. Look at the following data from the Central Board of Direct Taxes (CBDT) for 2006-07:

TDS Rs 70,889 crore; advance taxes Rs 1,21,527 crore; self-assessment Rs 13,825 crore; regular assessment Rs 30,397 crore; other receipts Rs 20,195 crore; total Rs 2,56,633 crore; refunds Rs 37,235 crore; net collections Rs 2,19,398 crore.

About 35 per cent of the collections accrue from TDS. Sections 44AD and Sections 44AE levy presumptive tax on profits of contractors. Such presumptive coverage has to be widened to include raw material suppliers for construction, sub-contractors, interior decorators, and so on.

Section 40(a)(ia) was amended recently to make TDS mandatory in respect of, among others, brokerage, commission and interest payments. This has hit honest traders while providing scope for tax management and planning for others.

If tax is deducted at source but paid into government account after March 31 of the relevant financial year, there will be a disallowance of the amounts involved. But if the tax deducted before March 31 is paid into government account after April 1, the very same payment will be allowed in the subsequent assessment when the TDS is paid into government account.

It looks a fair provision. But this will help companies to so manage their affairs that disallowance can be courted by non payment of TDS into government account in the year of loss and claiming the same amount of deduction in the subsequent year of profit.

Capital Gains

A sore point among fiscal purists has been the present regime for taxing profits arising out of transfer of shares in the stock market. Forget the endless debate about the Mauritian route for avoiding capital gains tax; that will be taken care of by the two governments. But to stop the practice of multinationals avoiding tax obligations in India in respect of their Indian operations, the law may need to be amended.

The present system of finding out a permanent establishment (PE) in India or a business connection has only led to litigation. The relationship between the Indian subsidiary and the foreign holding company involves not merely complicated application of transfer pricing rules and regulations but also an examination of the business connection between the two.

The present arrangement under Section 9 has been found to be inadequate as can be seen from the litigation in the Rolls-Royce and Vodafane cases where the Bombay High court is seized of the matter.

Stock market tilt

Every Budget in recent years has been framed with an eye on giving sops for stock market operations. The Securities Transaction Tax (STT) has yielded a revenue of about Rs 7,500 crore.

The average daily trading in the Bombay Stock Exchange is around Rs 20,000 crore. It is necessary to have an audit trail of STT collections. It is also necessary to compare the loss of revenue by the abolition of the long-term capital gains (LTCG) tax with the gain in revenues from STT.

There is a school of thought which believes that the rise in the number of high net worth individuals with assets exceeding $1 million dollars is due to the non levy of the LTCG tax and the exemptions from wealth tax for equity shares. As per data compiled in 2002 there are one lakh high net worth individuals.

The question arises whether considerations of equity are satisfied in this sort of exemption at a time when one-third of the countrys population is below the poverty line. The abolition of the gift tax levy has meant large-scale evasion. The treatment of gift as income under Section 56 has not helped matters.

Leading public figures have been able to show wealth in crores of rupees as accumulated from contributions made to them by well-wishers, admirers and followers. This escape route from the clutches of income-tax is being exploited by the wealthy. The need for introduction of a properly drafted donee-based gift tax law has never been felt more urgently than at present.

(The author is a former Chief Commissioner of Income-Tax.)
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