“Rules are not necessarily sacred, principles are.”
Franklin D. Roosevelt
Indian income tax laws are considered to be among the most complicated statutes in the world. Rightly all stake holders- the tax administrators, practitioners and the tax payers- have shown concern for this. The shrill voices calling for substantial reforms in these laws and there by bringing in rationality in tax imposition, administration and collection have already assumed the proportion of a crescendo and there is no going back from here. This is ultimately going to result in the demise of the existing legislation and dawn of the era of DTC- Direct Taxes Code.
Values and principles had seldom assumed such high significance, in the recorded history, as they do now. In most of the countries, more so in case of the civilized world, there is a genuine concern for principles and values. Again and again practices like dictatorships and intolerant religious polities are getting replaced by pluralistic democracies. In the same vein ideologically bankrupt ideas like usurious taxation to feed a lethargic bureaucracy is giving into privatization and enabling tax legislations. This move towards, first identifying the right principles and then aligning the policies and procedures in line with those identified policies is getting more visibly manifested in case of fiscal legislations and accounting best practices. Two examples would more suitably demonstrate this shift; one is the case of the global raze for IFRS- International Financial Reporting Standards- and the other is the current reforms in Indians tax laws.
IFRS-Hopefully the US will take the right call in 2011:
Prevailing Accounting standards in the US are much too detailed and as per some claims the literature containing the accounting standards in US run into more than 20,000 (twenty thousand) standard pages. This huge output is due to the rule based approach that they have followed in the US. Now there is a good possibility that the US will adopt IFRS, which is principle based, and hence is far too less bulky in comparison to US GAAP- Generally Accepted Accounting Principles. It goes without saying that this is a paradigm shift and this is going to change the world, for the better, very radically.
In a lighter vein, shall we say, the Americans are revisiting the fundamentals as laid down by their past president- Dwight David Eisenhower- who said: “People who value their privileges above their principles soon loses both.”!
As the LPG- liberalization, privatization and globalization- culture and the resultant reality of ‘a global village’ is no longer a matter of fancy or choice but is an actual reality, we are also riding the bus! Though the international community aspires us, and also the US, to adopt- not just converge with- the IFRS; we have gone the convergence way and hope the policies would be better aligned in the future.
In case of the reforms in tax laws we can discuss it by talking about its two legs- Direct taxes and Indirect taxes- separately.
Principles of Taxation:
As we’ve stated at the outset that the flavor of the time is principles, let’s briefly touch upon the principles that should guide policy formulation on taxation.
Adam Smith – the pioneer political economist, better known as the father of modern Economics for writing the magnum opus ‘An Inquiry into the Nature and Causes of the Wealth of Nations’- has listed the following as the four canons of taxation:
1. Equality: (Ability-to-pay) “…ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue (income) which they respectively enjoy under the protection of the state.”
2. Certainty: “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.”
3. Convenience in payment: “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.”
4. Economy in collection: “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.”
Perhaps we can add a fifth: ‘Simplicity’, to the above list. We can safely assume that for Adam Smith this principle is embedded in the canons of ‘Certainty’ and ‘Convenience in payment’. For, unless the tax provisions are simple to understand and adhere to, the canons of ‘certainty’ and ‘convenience in payment’ would be defeated.
What is more, there should be a balance between the above principles. In the name of upholding the principle of equity or for that matter any other principle or a combination of a few principles the laws should not lose complete sight of some other principles.
Indirect taxes:
The delay in implementation of GST- Goods and services Taxes- is now really reflecting upon the fractured nature of our polity. As it also impinges upon the federal nature of our polity, which is a very fundamental aspect of our democratic pluralism, it requires a bit of tight rope walking. Up till now the central tax authorities and the different provincial tax authorities have not been able to come to consensus with respect to revenue sharing, statute making and dispute resolution mechanisms for GST and hence implementation of this very important enabler is getting delayed. That we are getting closer to its actual implementation, every year, and probably going to get a more full proof system is the silver lining. Besides haven’t we got used to such procrastinations, prevarications and mud slinging!
With the declaration of the proposals regarding creation of a sound IT- Information Technology- back bone and the fact that this crucial job is going to be supervised by none other than the redoubtable Mr Nandan Nilekani- chairman of UID project- brings solace to our hearts. Apparently, though implementation of GST would get a bit delayed yet the process is very much on the rails and is kicking!
Direct taxes
As GST is to indirect taxes so is DTC- Direct Taxes code- to Direct taxes.
In the instant case the author would humbly attempt to point out just one anomaly which emanates due to putting undue wrong emphasis on the principle of ‘equity’ in gross disregard to the principles of ‘simplicity’, ‘certainty’ and ‘ease in payment of taxes’
This anomaly has arisen due to acknowledging multiple categories inside the definition of ‘individual’ as is appearing under section 2(31) of the Income tax Act 1961 and then prescribing different exemption limits for different category of tax payers inside this classification.
Till 2005 ‘individual’ meant only one thing- an individual. It got trifurcated when the then wise FM – Mr. P. Chidambaram- brought in the distinction of women and senior citizens, from others, in budget 2005-06.
Just six years down the road, in the union budget for 2011-12, his successor has capitulated to the same temptation: to further complicate the provisions! And in the process has further widened the chasm by bringing in one more category: ‘very senior citizens’.
Why do they do this?
Well, the stated purpose is to further the avowed exhortations that we’ve made in the preamble to our constitution –‘that we would strive to achieve equality of status and opportunity for all’. As discussed above, equity is also a cardinal principle of taxation, yet it is certainly not the only principle and hence it has to function in coherence with its other cousins!
Selective amnesia prevails over these gentlemen- Finance Ministers under different regimes- who forget in the momentary pleasure of populist high, which they get by giving in to such rank populism:
• That now we’ve the ignominy of having one of the most complicated tax laws.
• That ideally the Income Tax law should primarily attempt to do that what it is meant for: raising tax.
• That the objectives are better achieved by adhering to certain time tested principles like simplicity, certainty and ease in discharging the obligations instead of making posturing for just one- equity.
• That prudence dictates that, in a taxing statute the number of exemption provisions should be very few and the above categorization is nothing but partial exemption provisions and hence keeping those limited to one would serve the leitmotif of reforms in tax laws: simplification.
DTC- Direct tax code- is definitely going to get affected by these populist capitulations. This is already evident in the fact that though the initial draft of DTC alluded to the pre- 2005 era provisions with respect to that of ‘individual’, subsequently they had to concede one more exception in the form of a separate acknowledgement for the senior citizens. It was really surprising that in an era of rising women power they did away with the existing preferential treatment for women by removing the increased exemption limits for them.
However in light of the concessions made in this years budget, AY 2011-12, by conceding another additional categorization in the form of ‘very senior citizens’, which is happening in the immediately preceding year- assuming DTC would be implemented in 2012- can the government continue with this just two tier categorization, for the term “Individual”, in DTC?
What is more?
This distortion could become much more acute if the present PM -and the visionary FM of early 1990s- gets back the finance portfolio; for then he might seek a preferential treatment for minorities; as he has publicly declared that the minorities have the first claims against the national resources! For claims to resources could be made in two ways, either by laying hands on the national resources or withholding the dues to the national exchequer. A higher income tax exemption limit would just fit in to the later constructs.
The term in vogue these days is ‘empowerment of the youth’. So some populist leaders, sans any real vision, might demand a preferential treatment for the youth and as the people below 35 are going to constitute the biggest block of the electorate, in the coming years, those demands might be conceded. Then we would end up with 5 blocks, according to age; say:
Individuals below 20,
Individuals above 20 but below 40,
Individuals above 40 but below 60,
Individuals above 60 but below 80 and
Individuals above 80
Please remember the above blocks will have further empowering provisions- read as complications in the form of sub blocks- according to sex- male and female- and then according to their religious status- minorities or otherwise.
The champions of caste politics would clamor for equity for the historically underprivileged and that would call for further complications in the form of accommodating the interest of STs and SCs, OBCs and SEBCs.
Still the demand would not end; physically and mentally challenged people would rightly claim preferential treatment. For, who on earth would not admit that a male blind person is more disadvantaged than a healthy woman with the faculty of unimpaired vision?
If this loophole is left unplugged then provisions for individuals alone would require an entire chapter and in the process the attempts to simplify and rationalize direct tax laws by bringing in DTC would go for a six!
"History repeats itself, first as tragedy, second as farce”.
Karl Marx
Last words:
To achieve equity we can further enhance the exemption limits; say from Rs 200,000 to Rs 300,000 for all individuals.
Let’s admit bulk of our very senior citizens live in our villages and it does not matter for them if we have a higher exemption limit for them, for bulk of them are not in the income tax net! Despite so much of urban migration, still 70 percent of Indian populace lives in villages and most of them are poor or marginally well off. What these elderly Indians need is functional public hospitals and other public facilities, which can be provided only if we’ve a sound policy regarding raising and spending taxes.
And having addressed the issue of equity, while finalizing the DTC provisions, would it not be nice if we reverted back to the simple slab rates – as they existed before 2005? Would it not be just nice if individuals meant only individuals and no distinction was made for age, sex, caste, religion, race or physical abilities?
