Widening the tax base — the unfinished agenda

The expression “Widening the tax base” would have appeared in every Budget speech of the Finance Minister from 1947. We have in the recent past tried to bring in tax reforms to widen the tax base. Tax reforms have essentially two objectives — first is to make the tax laws as simple as possible and second is to have moderate tax rates. Moderate tax rates and expanding the tax base are now internationally accepted as two essential pillars of ensuring simple and stable tax system. The crucial issue is where is the resting point as far as the tax rate is concerned? The tax rate in Japan is at 41 per cent, in Singapore is 17 per cent and in India, it is around 33 per cent.

One approach to widen the tax base is by extending the coverage of the presumptive taxation scheme, which is easy to comply with and administer, like, taxation of professionals.

Improving tax climate

Introduction of Direct Tax Code (DTC) as early as possible could also widen the tax base since the Code has the necessary ingredients to achieve the same to some extent. For example, a wholesale restructuring of the slab rates will lead to the desired objective of the tax base being widened. As envisaged in the DTC, restructuring will benefit the tax payers up to Rs 5 lakhs, who will go out of the tax net. But it could also result in bringing additional revenue by ensuring better compliance mechanism. This is one of the ways of improving the overall tax climate in India. There is already speculation that the minimum threshold limit may be increased to Rs 3 lakhs.

Ensure compliance

Although filing income-tax returns have been simplified, the administration needs to make it more accountable to ensure that compliance levels improve at a faster pace so that the number of taxpayers is increased. It is relevant to note that 45 per cent of the population in the US pays taxes when compared to a 3 per cent in India. Hence, there is a dire need to broaden the tax base by bringing in the culture of compliance.

Another area which has been debated in the past to widen the tax base is to tax agricultural income The fact of the matter is with the service sector growing at a brisk pace, most players of the agricultural sector are subject to service tax in an indirect manner. Hence, it would be difficult to bring in agricultural income within the ambit of income-tax.

Taxation of trusts has also been a contemplated issue in the DTC and recommended by several committee reports in the past. Notwithstanding the laudable objections pursued and implemented by various trusts, there is a prime need to tax the surplus of income over expenditure of the trust. The DTC contemplates a 25 per cent tax levy on such surplus, which will result in the widening of the tax base.

Most effective

Lastly, withholding tax as Tax Deduction at Source (TDS) is the easiest way to collect taxes at the threshold itself. Almost all types of payments — domestic and international — are subject to TDS in some forms. The authorities have been extending the coverage of TDS year after year. Experience has shown that TDS not extending several disputes is the most effective mechanism of widening the tax net.

Today, as tax policy is closely linked with the overall economic agenda and the need to attract foreign investment to achieve the growth rates planned for each year. The need to widen the tax base is however, a continuous process and there is no finish line.

(The author is Tax Partner, Ernst & Young.