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T. C. A. Ramanujam

For widening the tax base, the host of amendments proposed in the Finance Bill, 2002 may not be good enough, says T. C. A. Ramanujam

THE memorandum explaining the Finance Bill, 2002 provisions has a chapter on widening the tax base. All that the memorandum has to say in this regard is the taxation of dividends in the hands of shareholders consequent to the omission of Section 10(33) and the amendment to Sec 115(O). Provision is made for tax deduction at source on dividends at 10 per cent. The incidence of tax in respect of dividends is shifted to shareholders even in respect of unit-holders of the UTI and mutual funds — a concession to open-ended equity-oriented funds of the UTI and other mutual funds. The new Section 115 BBB provides that income from the units of such funds will be taxed at 10 per cent only. These facilities will be available up to March 31, 2003.

Section 195 has also been amended. As a result, the payment of dividend to non-residents will now be covered by the TDS provisions. This, however, will not apply to a foreign company. The new Section 196A provides for TDS at 20 per cent in respect of income paid to non-residents holding units of the UTI and mutual funds.

There are, however, other amendments to the Income-Tax (I-T) Act, which will have significant bearing on taxpayers. Casual and non-recurring incomes are exempt at present up to Rs 5,000 a year. The exemption is now withdrawn by way of an amendment to Section 10(3).

Amendments to Sections (5B), 10(6A) and 10(6B) relate to exemptions hitherto granted for foreign technicians. Tax paid by the employer on the remuneration of a foreign technician will now be included in computing the total income of the technician. Similarly, the tax paid by the Indian concern or by the Government on royalty/fees for technical services paid under an agreement will hereafter form part of total income of the person receiving such royalty or fees for technical services.

Taxes paid by another person on behalf of an assessee will, henceforth, be considered as part of the total income of the assesse. These amendments will apply to agreements entered into on or after June 1, 2002. Even passage money received by an employee who is not a citizen of India for himself, his spouse and children will not be exempt following the omission of Section 10 (6)(i).

Local authorities were hitherto exempted in respect of income arising from the supply of goods or services within the jurisdictional area. The exemption will hereafter be limited to panchayats and municipalities. Section 10(20) has been amended for this purpose. Even housing boards have now been brought under the tax net via amendment to Section 10(20A). Again, by virtue of amendments to Section 10(23), exemptions to sports bodies stand withdrawn. Obviously, such sports bodies will have to satisfy, henceforth, Section 11,12 and 13 requirements. Warehousing corporations, too, stand to lose exemption following the amendment to Section 10(29).

These are no doubt important amendments, but tax evasion in key areas continues to be rampant. The Comptroller and Auditor General of India reports that of the 21,103 private hospitals and nursing homes in India, as many as 13,863 do not file income-tax returns. Nearly 83 per cent of such units in Delhi are outside the tax net. In Maharshtra, only 575 of the 4,564 hospitals fall under the tax net. In Chennai though, the situation is better — 966 of the 1,168 private hospitals are compliant.

According to an I-T expert, in the last half a century, the proportion of direct taxes to non-agricultural net domestic product has not risen — it stood at 4.03 per cent in 1948-49, 6.04 per cent in 1963-64, 5.88 per cent in 1975-76 and a mere 4.77 per cent in 1999-2000. The close to six-fold increase in the number of taxpayers — 40 lakh to 230 lakh — in the past decade has proved to be infructuous. Over a crore individuals, forced into the tax net through schemes such as one-by-six, pay either nothing or negligible amounts. Their total contribution to revenue does not equal even 0.1 per cent of GDP.

Obviously, both the tax administration and fiscal system should make all-out efforts to widen the tax net. Agricultural income may be tax-free, but should exemption be extended to foreign corporations specialising in artificial and genetically modified seeds? Far too much attention has been paid in the Finance Bill to taxing the fixed income groups. The tax net can be widened only when the service sector is covered fully and strict vigil exercised over tax evasion by individuals and corporate bodies with deep pockets. Is it not an anachronism that there are only 40,000 taxpayers with incomes over Rs 10 lakh a year?

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