The need to keep tax rates and laws under certain norms has been emphasised by political philosophers and economic analysts from time immemorial.
The countrys direct tax laws have been complicated ever since the Income Tax Act 1922 came into force. The 1961 Act was no better and with too frequent amendments to law as well as the rates, tax law and administration have increasingly contributed to complications, confusion and corruption.
The direct taxes code (DTC) attempted by the government in 2009, which was supposed to bring in simplicity, certainty and easy administerability, came in for enormous criticism since the sweeping changes contemplated were neither pragmatic nor reasonable in certain areas relating to company taxation, taxation of savings/ perquisites/ capital gains/ business income.
The most attractive feature of the DTC was to remove many exemptions and to lower the tax rates. The attempt was no doubt laudable. However, the criticism against the code was that it was not pragmatic in its approach as it resulted in new complications in tax law.
The government accordingly has brought out a discussion paper on certain changes proposed in the light of various criticisms from the public/ tax experts. While the main attempt of this discussion paper is to make the law more pragmatic, it has significantly stated that the originally intended lower tax rates will have to be recalibrated to ensure revenue neutrality.
Having been in tax administration for more than three decades and having seen the steady deterioration in tax administration in recent times, I am of the view that the tax rates can substantially remove its irritable character if they are kept as reasonably low as possible along with simple law.
If the tax administration can be rationalised and made more taxpayer friendly, the proposed changes need not necessarily result in recalibration of tax rates. For example, a simpler scheme of taxation of salaries at a flat rate on gross receipt basis with two slabs varying from 15 to 20% of the gross income can do away with many complications in taxation of salaries.
The perquisites part of the salaries can be taxed in the employers hands. Similarly, a small refinement in the security transaction tax instead of bringing back the old complicated method of taxing capital gains after indexation with attendant litigation will ensure revenue neutrality along with simplicity.
In the case of security transactions tax, which has an advantage of capturing tax on all such transactions, a provision can be made for deducting tax at higher rate in respect of transactions within one year. The old system of taxing capital gains will definitely result in more leakage of revenue and litigation.
What is therefore crucial is not the revision of tax rates due to proposed changes but an efficient tax administration.
There is so much of lacunae in tax administration, especially in such matters as appointments, job content of various posts, collection of intelligence and system of investigation, tax assessment and appellate procedures that substantial revenues are lost due to lengthy litigation and time consuming procedures.
Therefore, there is no need to increase the tax rates provided genuine attempts are made to improve tax administration. Lower tax rates along with reasonable tax administration can always bring in more resources than higher taxes and complicated tax administration.