new Code is a problem to taxpayers

Pranab Mukherjee must look for ways of tax reduction as higher rates lead to more evasions


My appetite is infinite and greed is more," says Finance Minister Pranab Mukherjee to Income Tax Commissioners exhorting them to collect more. He also hinted at unfolding the revised draft of the direct tax code and phase-out deductions.


The Finance Minister has only hinted at more trouble for the citizens as he called upon the officers to surpass the target of Rs 4,30,000 crore set for the current fiscal. Phasing out exemptions would effectively increase the tax rates as there is no proposal to reduce the present slabs.


It also opens up the debate of having income tax as an oppressive tool of the state particularly in a country that is having one of the highest tax rates. A citizen is made to pay 65-70 per cent of his income as taxes — direct, indirect, provincial and local — in addition to various toll taxes. One obvious fallout of the high tax rates is on the market as it depresses the capacity of the so-called middle class to spend. This lowers activities in the market. The tax policy needs to bolster the Government's growth projection at 8.5 per cent. Besides, less than three per cent of the population come in the direct tax net — that is a little over two crore of 110 crore. In a country where most have a low income, even after intense efforts the number may not rise much.


The Kelkar committee had noted that for such tax collection "efforts" the Government has been losing 48 per cent of the taxes it collects. Since then the department has added an army of officers, inducted through a fiat of the former Finance Minister, Mr Yashwant Sinha. The logical conclusion is that the Government is losing more money on collecting every rupee it adds to its kitty.


The citizen is not born to pay all his income to the authorities, whose accountability is often in doubt. The idea for revising the Income Tax Act was mooted primarily to simplify the cumbersome rules, rationalise the tax structure and simplify procedures in order to reduce hassles created by bureaucratic discretion. An unstated objective was to reduce corruption. During the last few years, a number of income tax officials were held with assets beyond their known source of income.


This has been possible owing to large discretionary powers that the officials have and multiplicity of rules that could be interpreted in many different ways. The system is oppressive for the tax-paying citizens. Instead of rectifying the lacunae, the direct tax code sought to further empower the officials. Instead of simplifying procedures, it has proposed to complicate them.


The code has stressed less on willful compliance or creation of a system where one would be tempted to pay tax. One blatant instance is the scheme launched for shopkeepers who were told to pay Rs 1,400 if their turnover was upto Rs 5 lakh. It failed because many who filed the returns and paid the tax were subject to a witch-hunt. The officials found it an easy tool to harass tax-compliant citizens. The scheme failed.


It is universally known that higher taxes lead to higher evasions. The corporate houses are masters of the art. They fudge accounts to reduce tax burden. The present rate of 33.5 per cent including various cess is oppressive. A compliant corporate taxpayer may find himself out of business. That is how there is opposition to the proposed minimum alternative tax. Tax deducted at source or TDS demonstrates the distrust the state has for its citizens and penalises the willing taxpayer and the service class.

So far the revised draft has not proposed any change in the basic tax structure. Unless it does so there would not be any rationale in doing away with exemptions the basic idea for which emanated from the suggestion of bringing down the highest tax rate to 20 per cent. The other slabs were expected to be of 10 and 15 per cent. The tax code has ignored this but gone on to increase the tax burden. The code needs more discussion. The Finance Minister should not be in a hurry to sate his greed.