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Like millions of Indians, I listened to budget speech of Finance
Minister P.Chidambaram on the 28th of Feb. It was a well prepared
speech and the FM should be congratulated for his efforts given the
compulsion of coalition politics. There has been enough media attention
on the last one week on the good things (which I should say definitely
is lot), so I don’t want to repeat it. Instead I want to focus on what
was not good. It is not to say that this was a bad job, but this was the “Dream
Team”, the dream of several crores of Indians. This team could have
certainly done a better job. Some of the tough issues that plague
Indian Tax System and Indian Inc. is unresolved. If it cannot be
treated with urgent surgeries by this team, it raises the question then
“Who can?”. |
As an Entrepreneur and a Tax Payer these are some of the issues I would have liked him to have done:
1) I liked his promise of simplifying the tax laws. He has removed
two Income Tax exemptions, this idea should have been extended across
the board and many such archaic exemptions and surcharges should have
been removed.
Reform and Simplify the complex/archaic Indian Tax laws (Customs
Duty, Excise, Income Tax & even the decade old Service Tax).
For example, if you have check whether a particular service is taxable
or exempted, you need to go all the way back to 1994 (or so) when the
Service Tax was introduced and then follow each years amendments.
Though the FM has subsequently announced a comprehensive look at
Income Tax Laws is on the cards and a new simplified law is expected by
Calendar Year End. He is currently talking about reform only for Income
Tax law, I am not sure why he is doing this piecemeal, it should be
across the board, covering all the tax laws of this country.
2) Related to my previous point is that the single largest
contribution to litigation is the ambiguity of the tax laws. This is a
huge problem for the Indian government which results in lower tax
collections. Even this years’ budget speech has its own share of these
“Unclear” texts – the fringe benefit tax is so vague that it currently
looks like a wide open avenue for Tax Officials to impose tax at will
for any corporate expenditure.
The only logical reason I can think of for these ambiguous tax laws,
is it benefits Indian Bureaucracy. As much as the great Indian
officialdom manages to have tax texts that are vague, it increases the
chances of different interpretations. For example, the Service Tax law
can be interpreted so differently - that for the same service, in
one region the officer might decide it is taxable. In another region
the officer can be influenced (and succeeded) to interpret it in a way
the service becomes tax-free!.
3) The Indian Labour laws is supposed to be dating back to early
british rule. No future government had the courage to enact modern
labour laws that benefit all the stake-holders. If India has to compete
with China and increase its world trade share from sub-one percentage,
this is top priority. FM and PM is deafeningly silent in this major
issue of Indian Inc. He should have also introduced a roadmap towards
moving to a comprehensive Social Security Plan (like in the western
nations).
4) The Golden Quadrilateral, the South-North Corridor, East-West
Corridor Road Infrastructure was one of the good things from Government
of India in this decade. FM is silent on the report card of this work.
He has promised more road projects, but his budget fund allocations
doesn’t map convincingly on this.
One of the reasons, USA is the world biggest economy; I believe is
got to do with its great Road Infrastructure. I was told that
during the recession periods of 1960s and 70s, US government had the
vision of building these massive road projects – which provided both
short/medium term employment and long-term free movement of goods and
people.
Maybe, these works are progressing well and FM has actually
allocated necessary funds, which a novice like me is missing. But
I just hope this super important project is not left to die, just
because it was brought in by previous NDA government.
5) Next is the now infamous “Cash Withdrawal Tax”. Though I liked
the idea when I first heard it – the idea of taxing 0.1% whenever you
withdraw cash more than Rs.10000 on a single day, sounds ill-thought
now. The claimed spirit behind the tax is laudable, that in India the
parallel economy is multi-fold of the regulated economy and huge cash
transactions are the biggest reason why it is flourishing.
In my opinion the reason this is happening is that almost any
transaction in India, could be done with “Cash” and almost all
merchants (including Foreign Banks and MNCs) encourage “Cash”. Managing
Cash is always risky and cumbersome; Cheques, Cards and Demand-Drafts
are easier to manage and extremely safe. FM should have done more to
educate users on these advantages, increase their usage, a Credit
Card/Cheque transaction tax benefit could have been given. He could
have also taxed the Merchants/Corporate who handle huge cash
transactions. What I am saying is, don’t tax the withdrawal of cash,
but plug the areas where cash can be used/accepted.
And the other bad news about this tax is that it is not Tax Deducted
at Source (TDS). Meaning the tax you pay for cash withdrawals, cannot
be adjusted against your regular Income Tax dues. This is another tax
and additional burden. So if you are an honest Indian tax payer, FM
wants to penalize/double-tax you. On the contrary, if you manage all
your income in the parallel economy (not depositing in banking channel
and not paying Income Tax), FM lets you go Scott-free. This is
counter-productive.
6) There was no effort made to widen tax net. In India, only a minuscule portion of people pay/file Income Tax.
In the last decade, FM helped to increase this marginally by his
innovative (at that time) 1/6 scheme – whereby if you happen to fall
under one of the 6 categories (Foreign Travel in last 12 months, own a
mobile phone/credit card/car, etc), even if you are not liable to pay
tax, you need to file income tax returns. What was needed now was such
new (out-of-box) thinking. For some reason, FM’s team severely lacked
it this time.
7) Though security is of top-concern for India, FM should have
reduced his Defense expenditure. This would have certainly been
reciprocated from Pakistan’s side. Both our nations need more food on
our people’s plate, rather than more bullets. Instead of more spending,
he should have aimed at plugging the leakages in defense purchases
comprehensively. He should have increased his ROI on defense capital.
8) Tax the agriculture income. Agriculture income still dominates
the Indian GDP and all of them go tax free due to existing laws. FM
should have taxed the agriculture income at a low rate of say 10% for
people who earn more than a fixed amount (say Rs.10 Lakhs and above).
9) Finally, increased his automation (IT) expenditure – you should have expected this from me, being a software guy 
.
We urgently need state of the art systems to manage our Tax Network
and avoid frauds. The fraudulent TDS Certificates (where bogus TDS
certificates are shown as tax paid) is one of the big loopholes in
Indian Tax system. I was told that ICICI Bank alone, every month dumps
truckloads of paper in every Income Tax Circle. How on earth, the
department matches this humanly impossible puzzle, is a big mystery.
Like in the US SSN (Social Security Number), in India we need
urgently one single number to identify a citizen/corporate – we now
have tens (if not hundreds). FM hasn’t outlined a good roadmap towards
this need.
Being the world’s software powerhouse, the government should have
demonstrated to the world, bold/innovative e-governance initiatives. It
had the opportunity, but not the will.