The Hindu Business Line : Are the proposals revenue-neutral?

The Finance (No. 2) Bill 2009 is an extensive document carrying out amendments to the Income-Tax Act, the Customs tariff and the service tax provisions. Of the 116 clauses in the Finance Bill, 83 relate to income-tax and wealth tax legislation.

Sweeping changes have been made in the provisions relating to these pieces of legislation.

The Finance Bill 2010 is just seven months away, and the Finance Minister, Mr Pranab Mukherjee, has also announced that the new direct tax code will be placed before Parliament and the public in the next 45 days. It is difficult to understand the rationale in rushing through major changes in the tax law at this juncture.

Tax-GDP ratio

The Finance Minister is justified in taking credit for the increase in the tax-GDP ratio from a low of 9.2 per cent in 2003-04 to 11.5 per cent in 2008-09. He rightly pointed out that the growth in tax revenues is attributable to the growth in direct taxes.

The share of direct taxes in the Centre’s tax revenues has increased to 56 per cent in 2008-09 from 41 per cent in 2003-04, reflecting a sharp improvement in the equity of the tax system. But Budget Estimates for 2009-10 indicate that the ratio is likely to fall to 10.95 per cent, because of the squeeze on profit margins of corporate houses and the likely fall in income-taxes.

Rates and slabs

The Finance Minister has rightly pointed out that tax rates are determined by the size of the tax base. If the tax base is higher, the tax rates can be lower. Tax exemptions erode the tax base.

Owing to exemptions, the tax rate of about 34 per cent on companies gets reduced to an effective rate of just 21 per cent. The Finance Minister is justified in declining to make any changes to the corporate tax rate.

In respect of personal taxation, global comparisons will show that there is not much scope for tinkering with the slabs or the rates. With the fiscal deficit at a high 6.8 per cent, the Government will find it hard to raise resources.

Where is the catch?

Mr Pranab Mukherjee has made it appear that he has made the taxpayer richer by raising the exemption limit, scrapping FBT and removing the surcharge on personal income-tax. He has also extended the benefits of tax exemption for export profits.

The Finance Minister has said that the scrapping of FBT will result in revenue loss of Rs 10,000 crore. FBT’s share has been less than 3 per cent of the total tax collected in the last three years.

What the Finance Minister did not mention is that the onus on paying tax on perquisites has now shifted to employees from the employer.

The Finance Bill specifically lays down that employees will have to pay tax on ESOPs and the employer’s contribution to the superannuation fund in excess of Rs 1,00,000 per annum.

Sweat equity shares have also been included as a perquisite. The erstwhile Rule 3 of the I-T rules will now be activated and the tax burden on the employees in respect of perquisites enjoyed by them will go up.

A third of the gross tax revenues is now being collected by way of tax deduction at source (TDS). While rationalising the TDS rates, the Finance Minister has proposed to reduce the rates to 2 per cent in the case of rent on plant and machinery, and 10 per cent for land and building.

The Finance Bill stipulates that if PAN is not quoted by the deductee, the TDS rate will be 20 per cent under Sections 194I and 194C. This will compel people to apply for PAN and expand the tax base.

Special provisions have been brought in for expanding the scope for presumptive taxation to all businesses by substituting a new Section 44AD in the I-T Act. The presumptive rate of tax will be 8 per cent of the gross turnover or receipts.

What about MAT? The rate has been raised from 10 per cent to 15 per cent. The revenue effect has not been spelt out. Nobody need be taken in by the claim that the direct tax proposals are revenue neutral.

(The author is a former Chief Commissioner of Income-Tax.)