In this world nothing can be said to be certain, except death and taxes”. This is a quote, which is widely attributed to Benjamin Franklin. One cannot do much about death but surely ease some of the pain around taxes.
The last few decades have seen various countries around the globe experiment with tax reforms. These include countries in diverse stages of development such as China, Indonesia, Columbia, Spain, Russia, Jamaica and the US. Even where the entire tax systems may not have been reformed, many have experimented with introduction of specific reforms of individual taxes. China has set an excellent example of introducing investment-friendly tax reforms and thereby managed to attract huge amounts of foreign investment. With globalization, regional integration and technology, tax systems will have no choice but to reform to meet the needs of new economic environment.
“File, smile and go” is the catch phrase coined by the Indian tax authorities. If some key suggestions outlined below are adopted and implemented in the right spirit, it would be a reality instead of just a catch phrase.
Simplicity: Tax laws should be simple enough to understand and comply with. There is a need to reduce the number of exemptions and concessions available. There are multiple slab rates, which determine the tax liability of individuals. A welcome move for them would be the simplification of the slab structure like the one that came in 1985-86 — the year in which the tax brackets were reduced from eight to four. The tax brackets have remained at four ever since and there is a need to reduce the number and make it simpler, especially for senior citizens where one single rate of tax beyond a level of income can be introduced. The current maximum rate of 30% compares favourably on a global scale but there is a need to increase the threshold to which it applies.
Pain reliever: A file photo of people rushing to file income-tax returns at a temporary office set up at Pragati Maidan in New Delhi. It will be easier for taxpayers if post offices and banks could accept returns.
Simplicity can also be ushered in by reforming the existing tax laws or by introducing a new tax legislation itself. Media reports indicate that a new tax code is ready and waiting in the wings. Perhaps the government could introduce this code in two separate and distinct sections. One entirely devoted to the individual tax payer and the other for corporate and other entities.
To usher in simplicity and aid in better understanding, illustrative examples could also be provided in various sections of the Act. The individual tax payer should be clear on what is to be paid, how it is to be paid, how the amount to be paid is to be calculated, when interest and penalties can be levied and how to compute the same.
It is not just the tax laws itself but also the tax return that requires simplification. Duplication in the collection of information should be avoided. If banks are required to disclose details of credit card payments, there is no need for a taxpayer to disclose card payments of more than Rs2 lakh in his or her tax return. This is just but one instance of duplication.
Transparency: This is an essential ingredient of any tax system, more so for an individual from a refund perspective. The income-tax department in Mumbai has put on its website the list of income-tax refunds of all salary payers, which could not be sent to the concerned persons for the assessment years 2003-04 to 2006-07 for want of correct address. Taxpayers whose name figures on this list can provide their correct details and the refund will be promptly sent to them. While the digital divide continues in India, introduction of this mechanism in all parts of urban India at least will usher in transparency in the regime. Online tracking of the status of the refund should be introduced.
Further, if refund is outstanding for a certain period—say three years or more— without it being in dispute, the taxpayer should be permitted to adjust such refunds against his tax demands. The tax authorities should come up with specific directions for adjustment of refunds.
Convenience: It must be easy to pay your taxes and file your returns. Perhaps, local post offices and banks could accept the tax return as well as a matter of routine. This would avoid the long queues which one witnesses each year at the income-tax office counter. E-filing could be another option, but it must remain an option and must not be mandatory for individual taxpayers.
The government has introduced tax preparers, who are trained by recognized institutions, to help people file tax returns. Their reach must spread wider.
In some tax developed economies, for instance, the US, the concept of “Ready Returns” has been introduced. The pilot project was introduced in California a few years ago. Based on the information collected from the employer and also the employees’ past tax return, employees get ready-made tax returns—courtesy the tax department. They merely have to review it, make necessary changes and file it, either electronically or a physical filing.
Contemporary: Tax laws need to be contemporary, not merely in terms of realignment of slabs or rates to keep attune with inflation, but also in terms of identifying and meeting new emerging needs. India’s youth (the median age in the country is 24.9 years) is getting increasingly mobile. Absence of totalization agreements (agreements between countries for exemption from mutual social security provisions) makes India very tax-unfriendly for employees coming in to work in the country and those going out to work to other countries. When Indians go to work overseas on short- to-medium-term assignments, they have to contribute to social security in the host country, at the same time; they are not able to reap the advantage of this contribution as they return to India on expiry of their work permits.
India has made a beginning with its first totalization agreement with Belgium but clearly there is a long road ahead on this considering Indians are headed all around the world. This of course, cannot be a unilateral move, but the government must continue to walk on the path of negotiations.
The tax system should be such that it caters to the taxpayers as also to the tax collector. India in its policy statements has stated its commitment to tax reforms—whether it is by introduction of specific reforms from time to time or by overhauling of the system. All agree that the need of the hour is an overall revamping of taxing philosophy and attendant structures resulting in tax reforms, which have a buy in from all (irrespective of political leanings) who care for India and its long-term sustained development.
Gaurav Taneja is national tax director and partner, Ernst & Young.
This is the first of a two-part series on tax reforms. The second part will be published on Saturday.
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