The Hindu Business Line : Tax reform: Change doesn't mean stability

The Taxation Laws (Amendment) Bill, 2005 has proposed a series of changes to the income-tax law. There is no doubt a need for tax reform, but the remedy for the fiscal ills lies not in introducing irksome levies, such as the fringe benefit tax and the cash transaction tax, but in pruning the tax law and making it simpler and less cumbersome, says T. C. A. Ramanujam

I believe that no civil servant should be allowed to work in the Finance Ministry unless he has taken a Foundational Course which emphasises one truth. The truth is that stability in tax laws is to a nation what stability in family life is to an individual; and therefore, where it is not necessary to change, it is necessary not to change. But stability is anathema to the North Block. Our Finance Ministry is filled with bureaucrats who eternally mistake amendment for improvement and change for progress.

— Nani Palkhiwala

EVEN before the Finance Bill, 2005 received the assent of the President and became an Act, the Finance Minister, Mr P. Chidambaram, had introduced in Parliament the Taxation Laws (Amendment) Bill, 2005, proposing a series of changes to the income-tax law.

The Finance Act, 2005 had 64 clauses to amend various Sections, which excluded, though, the new Chapter XII-H containing Sections 115W to 115WL levying the fringe benefit tax (FBT) and the changes to the law on cash transaction tax (CTT).

The newly introduced Amendment Bill has 16 clauses amending the various Sections in the tax law relating to charity, tax deduction at source (TDS), and so on.

It has been stated that the Bill will streamline the approval and monitoring process for certain charitable entities, scientific research associations, and so on.

The Bill prescribes filing of returns by certain charitable entities with aggregate annual receipts below Rs 1 crore (requiring payments exceeding Rs 20,000 to be made by way of an account-payee cheque or account-payee bank draft) and TDS on renting of plant and machinery, equipment, royalty and non-compete fee.

But there is a needless amendment relating to the denial of exemption to monetary help rendered in response to SoS from indigent patients who have to undergo emergency by-pass surgery or kidney transplant, unless such donations are routed through a recognised charity.

Should not these proposed amendments have been put off till Budget 2006? There are already 298 Sections and 14 Schedules in the I-T Act. And if the sub-clauses and provisos are taken into account, the number of Sections will be exceed 600. The taxpayer is being told that the tax law is being simplified and a new legislation enacted next year.

A 20-member Expert Committee has been constituted, comprising officers from the Finance and Law Ministries, to draft the new Bill.

Redundant provisions are to be deleted and the law is to be rewritten to reduce ambiguities that lead to litigation. It may be recalled that it was Mr Chidambram, as Finance Minister in the United Front Government, who had introduced a draft Income-Tax Bill in 1996; this could not be pushed through, though.

The one-by-six scheme

The need to widen the tax base has been a much-discussed issue. Mr Chidambaram took credit for the introduction of the one-by-six scheme, forcing certain categories of individuals to file returns even if their income did not exceed the taxable limit.

But the number of tax returns under the scheme has been falling year after year. The need for the scheme, which is only adding to the paperwork of the Department, must be reconsidered.

Why not drop wealth tax?

It is also necessary to examine the need for continuing with wealth tax, which was diluted by Dr Manmohan Singh a decade back. Unexplained accretions to wealth are anyway taxed as income.

The revenue from the wealth tax is not commensurate with the workload involved.

The tax has lost its teeth. Recently, the French Finance Minister, Mr Thierry Breton, declared that the tax has become "no longer a wealth tax, but simply yet another tax on the savings and housing of our fellow citizens, who are by no means all wealthy."

Moreover, it is a "costly tax" which "can be economically dangerous". The French Prime Minister, Mr Dominique de Villepin, denied that reform was on the cards, but confirmed a review of the fiscal policy, including wealth tax, by year-end.

The Economist points out that impot sur les grandes fortunes (tax on great wealth) was introduced by Francois Mitterrand in 1981 and after a brief and controversial abolition, reintroduced in 1988 under the label impot de solidarite sur la fortune (ISF). The Economist argues that the economic case for change is strong.

A Senate report showed that the tax prompts a steady flow of exiles to lower taxed countries such as Belgium and Switzerland. It deplored a "loss of dynamism for the French economy" and said that, in the long run, "the situation is not sustainable... if we want to preserve the attractiveness of the country and, hence, French jobs."

But then, Trotskyites are still credible political voices and the revolutionary myth of equality runs deep. There is fierce resistance to any easing of stranglehold on the rich.

In India, there is no doubt a need for tax reform. And the remedy for the fiscal ills lies not in doubling the number of chapters and sections in the income-tax law, not in introducing irksome levies such as the FBT and the CTT, but in pruning the tax law and making it simpler and less cumbersome.

The Finance Minister can probably draw lessons from Denmark, Germany and the Netherlands and drop the Wealth Tax Act from the statute book.

The I-T return form itself can be redesigned so as to ensure that accretions to wealth are properly disclosed year after year.

It is unfortunate that the Finance Act, 2005 has converted the I-T Act into an omnibus law to levy tax not merely on incomes but also on expenses and gross receipts which may not have the character of income at all. The tax code had been turned on its head.

Tax reforms is, too, serious a matter to be dealt by politicians and lawyers. Economists and experts in the field should have a say.

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

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