Albert Einstein, the genius who could crack the most difficult problems in physics, once said: “The hardest thing in the world to understand is income tax”. One can say this is apt in the context of Indian tax laws for an individual.
As we have seen in our earlier article, outdated laws and a complex network of rules and regulations result in onerous tax laws. That said, the most daunting aspect is the perception of the legislators who believe that every small tax payer should be well versed with these complexities and comply with the same.
Each year small tax payers are forced to go through the arduous and vicious cycle of computing their tax liability, filing tax returns, identifying the numerous investment avenues that yield tax benefits, trying to understand the maze of sections and sub-sections and clauses of the Income Tax Act and the accompanying Rules and Central Board of Direct Taxes (CBDT) circulars.
Tax complexity not only causes misinterpretation of rules, omissions and unintentional errors but could also tempt small tax payers to be non compliant. The biggest dichotomy of the income tax administration in context of personal taxation creeps from the fact that all the tax compliances from tax return filing to tax assessments are almost same whether an individual earns a salary of Rs200,000 per year or whether earns Rs20,000,000 per year. There is a big chunk of marginal/ small tax payers which together contribute a very small fraction to the overall tax collections.
In this backdrop is it worth it to have so many compliances for the small tax payers? The CBDT would tend to say: YES. CBDT claims that the cost of collection of tax in India is one of the lowest in the world (less than 1% of collection).
This sounds good, but then again, it does not include the compliance cost of tax payers such as cost of getting tax registrations, filing of returns, maintenance of records, and the costs incurred by third parties like those obliged to deduct tax at source.
As per a survey report (undertaken in 2002) by National Institute of Public Finance and Policy (NIPFP) for the Planning Commission the compliance cost of personal income tax in India taking into consideration only the legal cost borne by the tax payers, could be as high as 45 % of revenue collected whereas cost of compliance in developed countries varies between 3.91% of tax revenue in UK in 1986-87 to between 7.9 to 10.8 % in Australia in 1990s.
The Kelkar Task Force tried to outline the steps required for improvising tax administration and simplification in context of personal taxation, however till date there has not been any drastic reform in personal tax law meant for reducing tax compliance cost except the steps taken for moderation of basic exemption limits.
As a new tax code is being drawn up, we can only hope that the new tax code does not create further havoc for small tax payers. There is a need to overhaul the tax laws to make it simple and user friendly.
Here is a wish list which will prove as a catalyst for boosting voluntary compliance and cost effective tax collection in context of small taxpayers including salaried tax payer.
(i) Ideally the Income tax Act should be bifurcated into two parts - corporate and personal tax and the provisions relating to personal tax should be simple enough for a lay person to understand and comply with.
(ii) The effective burden of taxes on the salaried class is much more than the self employed class which can claim deduction of various expenses incurred in the course of their business or profession. There is definitely a need to bring the two on an equal footing.
(iii) The salaried class with no other income, may be spared from filing the tax returns as the employer has already deducted tax at source. The basic exemption limit for interest income from saving bank deposits can be reintroduced so that the tax payers are not required to pay taxes or file returns merely because they earn a miniscule bank interest from their savings accounts.
(iv) Alternatively, a simpler version of above model may be that instead of computing tax liability of each and every employee by the employer, there may be levy on the employer at some average rate, say 20%, on the total cost incurred by it on payouts to the employees similar to Fringe Benefit Tax (FBT). The employers may pass on this tax cost to employees depending upon the pay scales.
(v) Refunds due in one year should be allowed to be adjusted against the tax liability of next year. This will go a long way in handling tax refund grievances.
(vi) Presumptive taxation may be introduced for individuals with business income up to certain level of turnover with an option to file returns if the tax payers wants to. This will not only simplify tax filing process but may also pave way for higher tax collections.
(vii) Lastly, simplification of the tax return forms is required. Take the example of Form No. ITR-4 which is quite cumbersome and runs in 20 pages having three main parts and 31 schedules. Simpler forms may be reintroduced for small and marginal taxpayers.
Some of the suggestions such as an average rate of tax for the salaried class might sound radical and would definitely be criticized on account of inequity. However, introducing a mechanism where a salaried employee does not have to file a tax return, the condition being that tax has been deducted at source by the employer on such income, will go a long way in making life easier for the small tax payer.
The fiscal paradigm for personal taxation collection needs to evolve and attain maturity to restore tax payer confidence and jettison the processes and compliances which have so far only tempted one on the path of non-compliance.
Ganesh Raj, Tax Partner, Policy Advisory Group, Ernst & Young