During the past few years, our country has faced a lot of internal and external thermal stress without undergoing any severe fracture. We can assume that our economy may tug along at 5 per cent to 6 per cent, given our demographic profile, pattern of consumption, dependence on the service sector, and certain reform measures taken in the past few years.
However, given the present macro-economic conditions, our growth can suffer, in case the current account deficit continues to be high due to high oil price, and reform measures aren't taken expeditiously to correct the fiscal falls. In this Budget, there are a few good laudable proposals to tax the parallel economy:
To reduce the quantum of cash transaction in bullion, sellers of jewellery should collect 1 per cent tax in case the sale consideration exceeds Rs 2 lakh; To have a proper reporting mechanism, TDS at 1 per cent is to be collected by the transfer of immovable property, if the consideration exceeds Rs 50 lakh in urban areas and Rs 20 lakh in the remaining areas; All unexplained credits will attract a maximum margin rate of tax etc; Tax to be collected at source of trading in coal, lignite, and iron ore.
LEGISLATION
In addition to these, the Government can think of enacting a legislation that any cash payment above Rs 1,00,000 will be disallowed for income tax purpose, both in the hands of the payer and the payee, with a penalty equivalent to 100 per cent in the hands of the recipient. In addition to the legislative measure, the practising Chartered Accountant may be asked to give a certificate in this regard at the time of submission of the tax audit report.
The Government proposes to amend the provisions of Section 90 and 90A of the Income Tax Act to make a submission of the tax residency certificate as necessary, but this isn't a sufficient condition for availing the benefits of the agreement referred to in these sections.
In addition, the Government could reveal the entity of the holders of the participatory notes at the time of investment, as the main attraction of the participatory note issued outside India is that the investor needn't be registered with the Indian market regulator. The Finance Minister, in his speech, has mentioned that Goods and Service network will be set up and become operational by August 2012, and GST will implement a common PAN-based registration, return of filing and payment processing for all States on a shared platform.
Even today, as the PAN is being given in all the Indirect Tax returns, the department should reconcile the turnover of goods / services filed with the Indirect Tax department, compared to the turnover reported for Income Tax purpose. It is important that the quantitative particulars of turnover should also be reconciled with the respective returns wherever feasible. This may be extended to State VAT after the establishment of network.
TAXATION
It is surprising to see that while almost 60 per cent of GDP is from the service sector, the tax collected from this sector is only 23 per cent of the total indirect tax collected, whereas the tax collected from the manufacturing sector, including mining and construction, which accounts for around 27 per cent of the GDP, is 37 per cent of the total indirect tax.
Even today, there are assessees who either don't collect service tax, or after collecting service tax aren't paying it to the department. This should be plugged. Our tax to GDP rate has come down to 10.5 per cent from a level of more than 12 per cent, while the median Asian rate is 16 per cent. We should attempt to increase the tax collection not by increasing the rate, but by widening the tax base.
Attempts may also be made to incentivise the employees in the department, to bring in new assessees, particularly in the service sector. We need to make sure that various IT systems talk to each other. The recent Karnataka Lokayukta report on illegal mining, pointed out how India's banking system wasn't able to prevent the avoidance of tax, because of its inability to match the two databases, one from the customs authorities, and another from the banks. Many European countries get a 360-degree view of individuals by linking the IT systems, including the banking system.
We should reconcile the total exports as per the customs department and the collections made through banking system on a monthly basis. Even though one system is on mercantile basis and another on cash basis, once we start doing this, with time, it is possible to smoothen the process.
We also need to make sure that all the non-profit organisations who are receiving funds from abroad in excess of a certain limit, say US$ 1 million, are required to file income tax returns as well as annual returns with the Home Ministry.
We may tax the income from Farm Houses within a radius of 25 to 30 kilometres from the city and the assets under wealth tax, as they needn't be exempted under the definition of “agriculture income”.
EXPENDITURE
The Finance Minister has already outlined certain measures to bring down the subsidy, and one hopes that this will be implemented in the current year. As far as expenditure is concerned, it is important that the Government comes out, at least on a quarterly basis, with a report on “Outlay vs. Outcome”. The Government has been talking of this for quite some time but hasn't implemented it.
The Government last year imposed a cess of Rs 50 per tonne on coal to provide for a separate transmission line for the distribution of renewable energy. One doesn't know the progress on this subject so far, though we know the cost of power has gone up as a result of the introduction of new levy!
We have been paying, for the past few years, Rs 1 per litre on fuel as road cess. One doesn't know the exact quantum of amount collected as a result of this cess, and the number of kilometres of road laid using the cess.Unless the Government is transparent, the governance may not improve, and corrective action may not be possible.
(The author is CFO, TAFE.)