Simplifying the tax system

Much has been said, debated and discussed about the idea of replacing existing tax regime of multiple tax points – Income Tax, Wealth Tax, Excise Tax, Sales Tax – VAT, Octori, Local Body Tax, etc with just one tax point system of Goods and Services Tax or Banking Transaction Tax.

I believe at 67, the country has matured to initiate a debate on how effective the existing taxation system has been and do a cost-benefit analysis.

To clarify, a Pune-based think-tank –Arthakranti – has made a detailed presentation on their proposal of introducing Banking Transaction Tax. Among many suggestions, they propose banning currency notes over ₹ 50 curtail legal protection for cash transactions of over ₹2000, tax each receipt in the bank account at rate of 2% as Banking Transaction Tax. It is their belief that such tax regime would curtail corruption, reduce tax collection cost and boost revenues.

Unfortunately, the media in all its fairness, started badgering their favourite punch-bag – BJP – for even thinking of considering this proposal (skipping the fact that this is being considered along with many other tax structure models – whether media skipped by oversight or by design; I leave it to their wisdom and truthfulness). An editorial in ‘Business Standard’ ‘declared’ it ‘BJPs strange brainwave’, ‘poorly thought out’ and ‘radical plan’! So much for just receiving the proposal from citizens of this country and considering it without any bias!

To my knowledge, replacing multiple-tax system with simplified version of either one indirect tax called GST or via Banking Transactions has been in public discussion since the last eleven years (or may be more). A few years back one of the leading Mumbai based CA firm had published a similar proposal it in its annual Finance Budget Analysis. These proposals have been under consideration of many political parties and citizen think-tanks alike.

Rate of tax, currency denomination in circulation, basic exemption limit for cash transactions, exemption to banking transactions like loans, fixed deposits, demand-drafts, NPA-Stressed-Assets resolutions, etc can be simplified / details-modalities worked out and all such details / suggestions are still subject to feedback from citizens. It has been parliamentary tradition to put new legislations of larger public interest and implication in public domain in advance for feedback from citizens – recent two examples being citizen feedback for Lokpal Bill and Direct Tax Code.

I do not find anything wrong in remaining open to out-of-box suggestions. Point is government need not rush through every idea popped-up like it did in case of Aadhar project – a massive failure with high security risk and expense burden of over ₹ 1 lac crore, yet covering less than half of our population, banking linkages still not fully established and prone to money leaks.

The present Income Tax has outlived its utility. The cost incurred under the Income Tax system – direct cost: staff employed by Income Tax department, support infrastructure, judicial forums, legal teams, loss of interest on account of litigation delays (my dear friend has suggested RTI to get precise cost figure incurred at government end which we would certainly pursue, though I am sceptical whether accurate data would be shared in time detailing all the costs discussed here) and indirect cost: at the end of tax payers like professional CA & lawyer costs, litigation costs, loss of interest on account of refund and litigations, etc far outweigh the benefit of total direct tax collected.

Of approximately 17 crore people who are above poverty line, there are only approximately 3 crore assesses. Of these 3 crore assesses, the active assesses are even lesser who regularly file their return of income. This small group of tax payers cannot rationally be made to bear burden of entire 120 crore population needs. Certainly, there is a need for tax regime but the present system is greatly flawed.

On Indirect Tax front – Excise and Service Tax – the staffs employed are disproportionately low. The number of businesses- both under organised and unorganised sector spread across the nation is far more than the department can handle. Besides, there are constant technological advancements and changes in business models. The indirect taxes departments have just not been able to keep up with the business needs or understanding of the same. This has resulted in massive losses on indirect tax front – both in terms of loss of revenue and revenue tied up in litigations.

The recent service tax amnesty scheme is the case in point. The rate at which new services where bought under service tax net, the department just could not keep up with the pace, as it grossly lacked infrastructure and failed to understand how service industry operates. I doubt that no substantial recover could have been made in spite of this amnesty scheme.

In such situations, few honest who pay taxes in time and in-full are put to unreasonable cash-flow disadvantage vis-à-vis the routine defaulters – mostly due to lack of departmental vigilance and capabilities. Thus, again on indirect tax front too, it demands a cost-benefit analysis for continuing with existing model.

In the end, if the cost of collection for the nation (both at government and tax-payers end) exceed the benefits or net benefit is only marginal, then it can only mean additional tax burden on existing small group of tax payers..!!

More ideas are welcomed. Critical analyses with alternate solutions are welcomed too.