The Income Tax Act runs over 950 pages with an assortment of 298 sections.
There has always been a lot of litigation regarding the interpretation of this Act. Every year the finance minister, under the guise of bringing simplification, makes the Act more complicated.
Let us delve into an expert's mind as he dreams of brighter days of income tax in India.
Exemptions and Deductions
Exemptions are stated under Sections 10, 10A and 10B of the Act. Chapter VIA deals with deductions from the taxable income. Some sections give benefits for the carry forward of losses of the earlier year, unabsorbed investments allowance and unabsorbed depreciation of the earlier year.
The present finance minister will, hopefully, bring in some appreciable change.
Instead of the ineffective two-pronged strategy of giving deduction and charging high taxes, the government may rationalise this by removing the benefit of deduction /exemption along with reduction in tax simultaneously.
This will also lead to the reducing of unnecessary litigations.
Investment schemes
Sections like 80CCC, 80L, 88 and others give benefits to assessees who invest in certain schemes. The government may soon modify these sections by putting all schemes under one section and the investor will be free to choose the scheme he prefers, encouraging free play between the market players.
The mutual funds and small investment schemes would be able to give their best performance since they will be competing against each other.
As an alternative, the government may remove all these benefits under Section 88, 80CCCand 80L and reduce the rate of taxation or increase the minimum threshold limit for the purpose of tax.
E.g. the minimum limit of Rs 50,000 may be increased to Rs 65,000.
Taxation in other countries
The government could follow polices such as those laid in countries like Dubai. A person would be required to calculate his wealth at the beginning of the year and also to calculate at the end of the year. The increase in the wealth would be subject to taxation. In this case, there will be no income tax, but tax on the increase wealth.
In countries like the United States, the government gives benefit to a person who has earned income, if he invests that sum into acquiring further business and reinvesting in the business.
This helps business growth and creates more employment opportunities. It increases the availability of goods in the market. Hence, there will be reduction in price due to competition. On the tax front, the government can earn on the federal tax.
Transaction Tax
The government introduced the Securities Transaction Tax (STT) last year. Under this tax, every time a person purchases or sells shares, he has to pay tax, which is insignificant, i.e. 0.15 per cent or 0.075 per cent.
In lieu of that, his long-term capital gain on shares is not taxable and his short-term capital gain on shares is taxable at a lower rate of 10 per cent.
The government may apply the STT to all the sectors and sales tax, custom, excise duties and all countervailing duties, etc. may be abolished. Those who undertake more transactions will pay more tax. Those who do not carry out any transactions would have to pay a lower tax since the quantum of transactions done by them would be lower.
This would find favour with people who preach secularism as the rich will automatically be taxed more than the poor.
Once the tax is levied on the principal amount, the collection and payment would also be easier as it would be inbuilt in the cost of any product.
The entire system of maintaining of IT records, departments and officers will not be required. The load on the exchequer would be greatly reduced.
Agricultural income and other exempt incomes
Any person, who earns income, including agricultural income, would necessarily be required to file his return of income, together with his profit and loss account, balance sheet and capital account.
A lot of people claim income from agriculture where no agriculture exists, thereby converting 'black money' into 'white' and show it as agricultural income. Once they file returns, and their returns are scrutinised, only the real agricultural income would then become tax-free.
Earlier the benefits of 100 per cent tax and exemptions under Section 80 HHC were available. These deductions were phased out from 80 per cent to 70 per cent and subsequently withdrawn, as a result of which the accounts of these individuals came under scrutiny.
The IT department found that suddenly the exports had come down and so had the quantum of transactions. This had raised a serious doubt about the misuse of the section. Therefore, the accounts of all exporters may soon come up for scrutiny.
At present, it is a builder's paradise. Section 80IB (10) gives total tax exemption to builders who construct residential houses. This benefit was given to ensure that low cost housing was provided to the community at large.
None of that has happened. The builders who have shown huge profits have usurped the entire profit. This is already under the government's magnifying glass.
Computerisation
Soon the government would require all transactions above Rs 20,000 per person, per year to be made through the bank accounts where the PAN of the persons would be noted. This would curtail the use of black money for all transactions.
Tax Deducted at Source
It has been seen that the provisions of TDS have helped a lot in the collection of tax. E.g. if a small contractor or transporter is paid a sum, such a person would generally never file a return or offer income for taxation.
People like the taxi driver or the owner of a paan/beedi shop may earn a lot, but do not pay any taxes, nor do they contribute to the exchequer in any way.
Soon, a system could be put in place, which ensures that tax is deducted at source by the payer, so that at least some portion gets taxed.
Interest mandatory
The Supreme Court, in the famous case of Anjum Ghaswalla, has held that the Income Tax authorities do not have any power to waive or reduce interest under Sections 234A, 234B and 234C. Thus, the interest is mandatory.
Service Tax
To date, the service tax is levied on certain specified activities i.e. all other activities are exempted. A lot of litigation has arisen as to whether a certain activity is taxable or not. If, taxable on what portion or to what extent.
However, the next Budget could change the entire scenario. If there would be a service tax on each and every activity, there would be a lot of income generated for the government.
Service tax has been a bonanza for the government. If you buy a product, you pay excise and sales tax. If you import a product, you pay customs. Similarly if you buy a service, you pay service tax.
The government has used this logic and in the next Budget, all services would be taxable, except those specified services, which would be exempt.
Unfortunately, the common man would have to collect, pay tax to the government and spend a great deal of time and money on the maintenance of record. If he defaults in any manner there would be serious consequences in the form of huge piling up of interest and penalties.
Investment Guide 2005. Get this latest issue of Money Simplified absolutely FREE! Click here!
More from rediff