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Income tax: What could happen

February 28, 2005

Within hours of the publication of this column, the proposals concerning income-tax matters in the Finance Bill, 2005 would travel from the stage of guesswork to reality.

The purpose of this write-up is to provide a background for judging the changes envisaged on the touchstone of rationality and reasonableness in the overall context.

My assessment of the situation from these angles makes me to formulate the following views concerning income tax in the Budget proposals:

  • The Finance Bill will not be loaded with too many tax provisions on the excuse of making tax reforms. The votary of reforms has to realise that the Finance Act is not the vehicle for bringing tax reforms in a big way because of constraint of time and secrecy aspects.

    Tax reforms cannot be conceived of and implemented hurriedly. Doing so has created numerous problems in the past. Hence, logically the Finance Bill should contain proposals concerning exemption limit, tax brackets, tax rates and other allied matters. It should not introduce complicated tax laws, which are not urgent.

  • Regarding tax brackets, the present scheme of tax rebate up to income of Rs 111,112 needs to be done away with as it unnecessarily complicates the computation of tax and introduce a new tax provision. Income up to Rs 1 lakh can be straight away exempted with provision for marginal relief. The new tax brackets can be on the following lines:

    Income(Rs.)                           Tax Rate

    Up to 1,00,000 Nil

    1,00,001 to 2,00,000 10%

    2,00,001 to 3,00,000 20%

    Above 3,00,000 30%

    Extending the 10 per cent bracket up to Rs 2 lakh would motivate many "non-filers" to file returns. Thus, in the aggregate, the loss consequent to extension of first slab would be more than made up.

  • To make the tax system more equitable and to ensure participation of the rural rich in the overall development by contributing their share to the central kitty, annual agriculture income from commercial crops exceeding Rs 2 lakh should be made taxable. The rural rich should also be subjected to wealth tax.

  • Special levies, like education cess, should have no place in the income-tax system. The tax collected through income and corporate taxes are meant to meet needs relating to education, health, internal security, development work, water, power, etc.

    Hence, a separate cess for such purposes are unwarranted. Such trend, if allowed to continue, could extend to unimaginable limits by bringing in health cess, development cess, social security cess and the likes. If the government's collection are inadequate, the tax rates should be hiked instead of introducing cesses.

  • Surcharge is not intended to be a permanent feature in any tax system. If the amount collected through surcharge is considered a must for the needs of the country, it would be incorporated by increasing tax rates in different brackets.

  • The 10 per cent surcharge (efficiency tax) on incomes above Rs 8.5 lakh in regard to only few sectors of taxpayers, ignoring well-organised sectors, like companies, should be withdrawn. It is apparently unjust and draconian as it is based on no principles or reasoning.

  • Ad hoc and summary decisions should not be taken on the existing exemptions and concessions. These should be eliminated in a phased manner, as has been done in the past, in regard to Sections 10A, 10B, 80HHC, etc.

  • Salaried employees too have to incur numerous expenses besides that of commuting between residence and place of work to keep themselves updated and survive in the globalised competitive employment market. Hence, there can be no case for abolition of standard deduction, as has been recommended by Vijay Kelkar in his reports on tax reforms. Rather, the present limits, which are unduly meagre, should be enhanced.

  • A comprehensive scheme for giving tax benefits for savings, which is spread over in many sections like 80CCC, 80L, 88, etc., should be formulated, giving the taxpayer freedom to invest in the scheme of his choice within a realistic limit.

  • Total exemptions for dividend income should be withdrawn. Only the dividend income of the lower-income group - say persons falling in the 20 per cent tax bracket, should be exempt. This would make the system more equitable.

  • And finally, no VDIS (Voluntary Disclosure Income Scheme), amnesty or bearer bond scheme to favour the tax-evaders and persons with black money should be introduced. This should be in accordance with the understanding given to the Supreme Court when an appeal in favour of the 1997 VDIS decision given by the Bombay High Court was being argued. This would also help the finance minister live down his nickname of 'VDIS-Chidambaram'.

    However, if an amnesty is considered inevitable, then a bearer bond scheme with zero interest rate for 5 years, amount repayable in the next 5 years at the rate of 20 per cent per annum of the amount invested should be thought of. Along with this, some strong measures for stopping the generation of black money should also be introduced.

    These expectations are based on rational argument and fair-play for the majority of honest taxpayers and it is hoped that the proposals contained in the Finance Bill, 2005 would be in tune with these just and equitable principles.

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