The Hindu Business Line : Let’s get real

That successive amendments to the Income-Tax Act have reduced it to a quilt-work of amendments and twisted it out of shape is known to everyone. Its labyrinthian provisions are mind-boggling and benefit tax consultants alone.

What we need is a simple I-T law akin to what we are striving for on the indirect taxes front and which we have christened as Goods and Services Tax (GST). Exemptions indeed have been the bane of our tax system. They can be easily done away with if only rates are rationalised.

Salaries

The salaried class bears a disproportionate burden of taxation vis-À-vis its business and professional counterparts. To be sure, it is also pampered with a host of exemptions especially on contributions to and receipts from long-term savings.

But all the same, it ends up paying more because it lacks the manoeuvrability of a businessman in arranging his tax affairs. In deference to this reality, the rate of tax on salaries must be concessional. This would provide a level playing-field between the salaried and the business class.

At the same time, all benefits enjoyed by them must be monetised and properly pigeonholed so that as far as possible there is no premium on and preference for non-cash remuneration. This might call for better cost accounting and allocation involving some nitpicking which for once would be welcome if only to eschew the obnoxious Fringe Benefit Tax (FBT).

If employees are taxed on the real income whether it is in cash or in kind, the bottom would be knocked out of FBT. Disallowance of non-business expenses would address the tangential and un-stated rationale for it. Retiral benefits like provident fund, etc., should be taxed on EET basis — exempt at both contributions and accumulation stages and taxable on receipt.

To take care of the bunching effect, retrial benefits may be allowed to be received in a staggered or phased manner at the discretion of employees.

Business income

Business and professional income ought to be taxed only on actual receipt. This suggestion may seem out of sync with times, especially when the Government itself has been brought around to embrace the accrual system of accounting. The point however is while accrual may be fine for accounting and reporting purposes, it is not so as far as income-tax computations are concerned.

Why should one pay tax on an income that he has not received? In fact, taxing business income on receipt basis would address the problem of provisioning for bad debts or NPAs, if you will.

All exemptions must go except perhaps the one relating to industries located in backward regions so as to encourage balanced development. SEZs have flattered to deceive. We were guilty of blindly aping China when we ushered in the concept of SEZ without realising that unlike China we are not an export-driven economy.

If exemptions are removed and depreciation rates harmonised so as to accord with the company law rates, the bottom would be knocked out of the invidious Minimum Alternative Tax (MAT) scheme as well.

Capital Gains

Capital gains, especially of the long-term variety, are unduly cosseted. There is no reason why shares should be treated as long-term assets merely after twelve months of holding, whereas the norm is 36 months.

In fact, shares should not be conferred the status of a capital asset at all unless they have been held for at least 36 months because the extant norms encourage people to board the capital gains bandwagon even when they are actually in the business of dealing in shares.

There is no reason also why long-term capital gains earned from recognised stock exchanges should be exempt from tax. There is no reason too why a person should be allowed to sell any number of long-term residential houses in his lifetime and walk away with exemption on each occasion so long as he recycles the resultant capital gains into another house.

In short, the capital gains tax regime is riddled with too many holes and some of them need to be plugged urgently not only as to foster horizontal equity but also to enable the exchequer to find more resources it badly needs to fulfil its social and other commitments.

(The author is a Delhi-based chartered accountant.)

We need to get real on the TDS front too. How can we expect the employer to compute his employees’ income from house property, which he must if they come to him for set off of losses from house property against their salary income?

The rates of TDS should not be rigid. For example, there is no justification for deducting a 10 per cent tax from professional receipts when the slab rates have been reduced. The extant regime of TDS certificates is slated to go from the next year as a sequel to the impending networking of the information system of the income-tax department across the country.

While networking would indeed enable various officers to access TDS information strewn across jurisdictional commissioners at a click of the mouse, taxpayers would continue to need the certificates because how else would they file their returns.

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