The Parliamentary Standing Committee on Finance under the chairmanship of former Finance Minister Yashwant Sinha presented its recommendations on Direct Taxes Code (DTC). In its 364-page report, it has made some far reaching suggestions on implementation of the new code, some of which have been accepted by the Ministry of Finance.
Its still complex for the common man! A first look at the report supported by facts & figures suggests a bias towards large corporates at the expense of the salaried class. The findings support a move to do away with all forms of exemptions barring a few. Remember, Sinhas budget in 2003 signaled a phaseout of tax exemptions. The panel felt that DTCs very purpose of simplicity is defeated despite half provisions (reduced from 750 to 319) as schedules to the code have ballooned & appear like semi-Act, rendering the code as a complex document.
The panel by recommending change in minimum threshold limit from 300,000 to 500,000 has demonstrated that, the income tax foregone is only Rs 11,000 crores which is roughly 7 per cent of the personal tax and less than 2 per cent of direct tax. More importantly, it comprises almost 90 per cent of individual tax payers. The Government last year notified that individual tax payers with income below 500,000 are exempted from filing returns to control administrative cost commensurate to collections. Though, there is no evidence on cost to administer these tax payers, I doubt if the Government would allow 90 per cent of payers to get away from the tax net. Reasons are manifold. After 50 years of independence, we couldnt manage one percent of citizens to pay tax. I recall, at the Kelkar Task force in 2002, less than 80,000 individual tax payers declared income above Rs 1 million. The joke at that time was that India has more than those number in a radius of 10 miles from North Block! Its only in the last decade that the figure has shot up to 3 per cent paying tax. Our problem lies in identifying tax payers due to a large part of population disguised in the form of tax evaders. Secondly, as the per capita income goes up and unorganized sectors come in the purview of the tax net, these 90 per cent individual tax payers would contribute more over the years besides my estimate that the figures will balloon to 5-7 per cent in the next few years. India has wealth with few wealthy!
I am in agreement with the panel that wealth tax threshold limit being raised 5 times to 5 crores (50 million) with three slabs of tax at 0.5, 0.75 & 1 per cent instead of one. If the existing limits have to be followed, we should have 1 per cent of citizens filing wealth tax returns and I doubt if even 10 per cent comply with it leave alone the fact that our wealth tax collection in 10-11 was Rs 682 crores which translates into less than half percent of Direct tax collections. The moral of the story is that there is serious rethinking required to re channel energies of our Tax officials towarsd large tax payers.
Build accountability In an unprecedented move, the panel has showered criticism with regard to high pitched assessments and has remarked that if field officers raise unreasonable tax demands which are finally quashed by the courts, it should adversely reflect their career dossiers. Further, appropriate actions should be taken against errant officials responsible for such acts. Lately, high courts & Supreme courts have been ordering costs including recoveries from officers salary if frivolous cases are brought to courts. Though, bringing such bold legislation are steps in the right direction, I wonder if it is practically possible. I recall a mention of such initiatives in Kelkar task force and the kind of stir it created amidst departments officers. All successive tax reforms committees were mandated to stay away from commenting on administrations efficiency. Having said that, I feel that this is an opportune time to give a serious look as such proposals which besides building accountability will enable an environment of trust & confidence with tax payers, which in my view is at a deficit.
Menace of delegated legislation is responsible for litigation Its an acknowledged fact that the Union is the biggest litigator and in particular on tax matters. The panel has pointed out that over 200 clauses in DTC leave scope for rule making or what is referred to as delegated legislation besides several parts require drafting proficiency. To some extent, delegation is unavoidable, the questions that need reflection are: why are critical matters left to delegated legislation? Delegated legislation has been a root cause of litigation in the past decades as it leaves wide discretion with the executive with the tax payer at his/ her mercy! The panel of course has not hesitated to point out supremacy of Parliament over the executive. Retired judges & senior lawyers who have overseen litigation in relation to the 1922 and 1961 tax codes have been prompt in pointing out drafting lapses and excessive delegated legislation as major lacuna in DTC. A well debated & thought through legislation would merely strengthen the law. There are detailed recommendations in relation to capital gains & taxability of not for profit organizations, which merit consideration. In addition, the panel has patiently heard all stake holders and made recommendations in relation to revamping of International tax provisions in for tax avoidance in the form of GAAR, CFC, POEM, & APA. It has in particular suggested independence of adjudicating authority & raising the level of tax officials responsible for administration. I earnestly feel that a serious relook be given to recommendations not accepted by the Government to ensure that the new code is balanced, objective and it meets the objectives of the Government & tax payers.