Latest Expert Exchange Queries

GST Demo Service software link:
Username: demouser Password: demopass
Get your inventory and invoicing software GST Ready from Binarysoft
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Popular Search: cpt :: form 3cd :: Central Excise rule to resale the machines to a new company :: empanelment :: due date for vat payment :: articles on VAT and GST in India :: TAX RATES - GOODS TAXABLE @ 4% :: list of goods taxed at 4% :: VAT Audit :: ACCOUNTING STANDARDS :: TDS :: VAT RATES :: ACCOUNTING STANDARD :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes
Direct Tax »
 Businesses need not deduct GST on advances received for goods supply: CBEC
 Redress taxpayers' grievances on priority: CBDT to I-T department
 No tax relief on EPF interest if not employed: ITAT
  CBDT signs 7 more unilateral APAs with taxpayers
 Income tax returns (ITR) filing: Get capital gains tax exemption on new property; here is how
 Reach out to non-filers of GST returns: CBEC to fields offices
 CBDT may shelve plan to seek corporate tax estimates in advance
 IT expertise at banks' board level a must, says RBI ED
 Clarification on Indirect Transfer provisions in case of redemption of share or interest outside India under the Income-tax Act, 1961
 To avoid double-taxation CBDT says no tax at upstream foreign fund if local fund paid already
 CBDT extends due date for filing Income Tax Returns and Tax Audit Reports

Surjit S Bhalla: Sense in Tax Code
June, 30th 2010

The new Direct Taxes Code (DTC) has been put in the public domain and will most likely be up for debate in the monsoon session of Parliament. There are three major components to the code personal income taxes, treatment of capital gains, and corporate taxes. This and the next article will talk about the first two.

But first, some deep congratulations to all those, and especially the UPA government, for daring to change the landscape. The credit largely goes to the present Home Minister, P Chidambaram, who, in his previous avatar, introduced wide-ranging tax reforms in early 1997. Then, starting in May 2004, he started his campaign again, and while there were some missteps (e.g. the fringe benefit tax, banking transaction tax), the overall thrust of tax reforms under his leadership has been immense.

And now the credit goes to the man for all seasons (and all policies) Pranab Mukherjee. We have been witness to a flurry of activity since his arrival on the scene in 2009. First, the successful fire-fighting with the Great Recession, then the introduction of long overdue rational pricing of fuels, and, of course, the presentation and championing of the DTC. A noteworthy feature of this new policy is the transparency and humility with which it has been handled. It has been up for debate, and the government is listening. Whether it continues to listen, especially on its rather non-economic, non-logic and ideologically inconsistent recommendations on capital gains tax, remains to be seen.

But there are many, including some senior economists/journalists, who question the DTC on its recommendation of personal taxes. Their belief is that the DTC is a giveaway, i.e. it has reduced the effective tax rate for all individuals by too much. If these learned people were younger, they would be chanting down with imperialism, down with fascism, down with capitalism and the government recommendations will only make the rich richer and the poor poorer. Further, according to the learned, this is a particularly bad time for giveaways because India has a major debt and deficits problem. And finally, the critics add, only 30 million or 3 per cent of the people in India pay taxes (this news is received with much applause by those who believe in rank populism). The 3 per cent figure is broadly correct. But not much more should be expected!

The reasoning is straightforward. First, the universe is not the total population but the worker population, and this is 40 per cent of the total.

Second, only non-farmers pay income taxes, and farmers are about 10 percent; so the relevant population universe is 300 million, not a billion. Given that not everybody who has income is eligible to pay taxes (there is a minimum exemption which, for the fiscal year 2009-10, is Rs 1.6 lakh per earner), the number of people in the taxable bracket goes down still further.

In 2007-08, the last year for which returns data are available, about 74 million workers were eligible to file tax returns, and 33 million did (see table). This means that only 7.4 per cent of the population should be filing taxes, and the fact that 33 million did is bad, but 45 per cent compliance rate (ratio of 33 and 74) is much, much better than only 3 per cent (the compliance rate is expected to have averaged 39/69 or 56 per cent in 2009/10).

The critics have a second arrow; they come armed with the following (and only!) fact in their favour, i.e. there has been stagnation in personal income tax (PIT) revenues. In 2007-08, PIT collections were Rs 118,000 crore, and in 2009-10, Rs 125,000 crore. Worse, the critics argue, the budgeted tax collections with the new 2010-11 code is only 121,000 crore.

While the bare facts are correct, the critics miss the whole picture. First, that there has been a phenomenal over-the-top increase in PIT since tax cuts were first introduced in the 1997-98 Budget. The effective tax rate (defined as the tax rate applicable to the tax-paying population) in 1996-97 was 16.8 per cent. The next year, the effective tax rate was reduced by more than 6 percentage points to 10.2 per cent, and in 1998-99, a recession year, the tax rate went up to 11.6 per cent. What happened to PIT revenues? They went up from Rs 18,000 crore to 21,000 crore, a 17 per cent increase (the 1997-98 tax collections are tainted by collections due to the tax amnesty VDIS).

How did tax revenues go up when tax rates were going down? Because of the Laffer effect, or the compliance effect. As tax rates are raised, more and more people cheat, and cheating takes two forms under-declaring your income, or not filing tax returns. As tax rates decrease, the reverse gear operates less people cheat, and tax revenues increase. Which brings us to the stagnation of tax revenues in the last few years. Note the steady increase in tax rates since 2002-03 in 2007-08, the effective rate was 15.7 per cent, almost identical to the peak tax rate of 16.8 per cent in 1996-97! Any wonder then that the government made the sensible decision of reducing the effective tax rate by 6 percentage points in 2008-09 and by a further 2.6 percentage points in 2010-11? And taxpayers are rewarding the good sense prevailing: Mumbai TDS returns for April 1 to June 9 are up 18 per cent over last year; and this, based on the reduced tax code!

There is logic and substance behind the governments new tax code. As the Indian landscape has changed, so has the tax code. Let us applaud the change, especially since this is a rare instance of the government being a few steps ahead of the so-called civil society intelligentsia.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Company Overview

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions