Recently, Tax Administration Reform Commission headed by Dr. Parthasarathi Shome (Chairman) Submitted its third report TARC/Report /36/2014-15 dated 30-11-2014 titled “Tax Administration Reform in India Spirit, Purpose and Empowerment” to Finance Minister. The three items covered by the report are as under:

1.    To review the existing mechanism and recommend capacity building measures for preparing impact assessment statements on taxpayers compliance cost of new policy and administrative measures of the tax Departments.

2.    To review the existing mechanism and recommend measures for deepening and widening of tax base and taxpayer base.

3.    To review the existing mechanism and recommend a system to enforce better tax compliance – by size, segment and nature of taxes and taxpayers, that should cover methods to encourage voluntary tax compliance.

According to the report, currently there is a perceptible gap between the potential and the existing number of taxpayers and the taxpayer base could be doubled to six crore taxpayers from existing base. The report emphasises bringing in new taxpayers and targeting under-taxed or un-taxed sectors. taxation of select agricultural income of large farm income setting aside small farmers below a high threshold could enhance the taxpayer base. Similarly, taxation of fringe benefits would enlarge the tax base and diminish tax evasion. Similarly, a comprehensive review of a large number of exemptions and incentives provided in law could yield areas for possible rationalisation. The report recognises that an environment of mutual trust between taxpayer and tax administration is a must, along with a strong political will to achieve positive outcomes.

The report sees an urgent need to set up an institutional structure that is to be termed the Knowledge, Analysis and Intelligence Centre (KAIC) for carrying out research and analysis for the expansion of tax and taxpayer base.

Expanding the Base
According to the report in India, only 17 crore have a Permanent Account Number (PAN) and out of these, only about 3.6 crore file income tax returns. Only 3.3 per cent of the population pays tax, which is very low compared to other countries. Despite, India’s low income levels, huge potential remains to expand the taxpayer base. Also there is a huge gap between the number of entities to which tax deduction and tax collection account number (TAN) has been allotted vis-à-vis the number of deductors filing income tax returns. The focus has to be on bringing in new taxpayers, rather than putting a heavier burden on payers who are already in the tax net by targeting sectors that are currently untaxed, especially the informal/unorganised sectors. The major comments and recommendations for widening the tax base are as under:

1. Tax Rates and Threshold Limits

If thresholds are raised and the rebate system ended, together with a super-rich tax rate that would compare with other countries, it would make the structures equitable without adding complexity.It is time now that the tax net is strengthened to encompass the big income earners meaningfully instead of repetitive squeezing of small and medium companies, the salaried and the middle class. It is surprising that the draft Direct Tax Code also failed to address the crucial point of a superrich tax rate.

2. Taxation of Fringe Benefits (FBT)

The Fringe Benefit Tax (FBT) was introduced as part of the finance Act, 2005. However legislators and government officials were out of the purview of the FBT. This violated the principle of horizontal equity since some taxpayers enjoyed these benefits without attracting levy of tax. Thus, a good tax that had the potential to reduce tax evasion and collected Rs.6,000 crore annually in revenue had to be abolished due to lack of horizontal equity and commensurate pressure from powerful lobbies who paid FBT. Re-introducing FBT, without the distinction that had been made earlier by keeping specific sections out of its purview, would be an effective measure to widen the direct tax base. This is a good temporary administrative measure for enhancing tax collection, until rising income tax collection makes it unnecessary.

3. Banking Cash Transaction Tax (BCTT)

BCTT was introduced with effect from June 1, 2005, through the Finance Act, 2005, to track unaccounted money and trace its source and destination. It remained on the statute book for about four years and was withdrawn with effect from April 1, 2009. BCTT was levied in respect of cash withdrawals in a day exceeding Rs.50,000 in the case of an individual or HUF and Rs.1,00,000 in the case of other persons from their bank accounts, other than savings accounts. The TARC is of the opinion that it had enlarged the information system of the Income Tax Department. There is no other instrument at present by which such information is being captured. With its withdrawal, an important source of information to monitor transactions of unaccounted money has dried up. The availability of information that was being collected through BCTT would certainly help the department widen the information base. This could be done through the revision to Annual Information Returns Rule 114E to include in its ambit cash withdrawals exceeding specified amounts (Rs.50,000 in the case of individuals and HUFs and Rs.1,00,000 in the case of other persons) made in a day from bank accounts, other than savings accounts. This will not inconvenience the taxpayers by making them liable to a fresh levy with all its procedural requirements. Alternatively, BCTT should be reinstated as an effective administrative measure.

4. Presumptive Tax for Professionals

The presumptive tax, therefore, needs to be reviewed so that the tax net is enlarged. To increase the growth rate of the number of effective individual taxpayers, there is a need to bring hidden tax payers under the tax net and one way of bringing hard-to-tax groups under the tax cover is presumptive taxation. The Kelkar committee had identified professionals like lawyers, doctors, accountant, architects, as the “missing middle”. For these professionals, a presumptive profit estimation scheme could be considered.

5. Tax on Agricultural Income

Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenues annually. A solution could be to tax large farmers. Against a tax free limit of Rs.5 lakh on agricultural income, farmers having a high agricultural income threshold, such as Rs.50 lakhs, could be taxed. This will keep small farmers out of the purview of taxation and yet close one escape route for black money. States could pass a resolution under Article 252 of the Constitution, authorising the Centre to impose tax on agricultural income

6. High Net-worth Individuals (HNWIS)

This category of taxpayers normally gets substantial dividend income. Currently, dividend income is tax-free in the hands of the investor as the company distributing dividend pays dividend distribution tax at the rate of 15 per cent. Hence, such HNWIs are taxed at a lower overall effective marginal rate than those having little or no dividend income. Many HNWIs use HUFs to spread their income and fall under the threshold limit to save the tax. HUFs are also known to launder money or receive money as gifts from relatives, especially from abroad. HUF cases can also be selected for audit. The need to focus on expanding this category of taxpayer base, therefore, is crucial at this point.

7. Excise and Service Tax

There is need to review whether the exemption from excise should be shelved or continued with lower value limits of say Rs.10 lakh to bring it in line with the one prescribed for small service providers. The scope of reverse charge for “goods transport operators service” takes out of the service tax net a sizable number of taxpayers. If the reverse charge mechanism for this service is withdrawn, it may bring a sizable number of potential taxpayers under the service tax as well as income tax net.

8. Tax Deducted at Source (TDS) Extension

TDS may be extended to areas such as commission paid to distributors and sub-distributors by firms, companies and other legal partners, amount paid in respect of value addition by manufacturers, lease rent or rent on machinery and plants that is debited to the accounts of a concern, market fees paid during purchase and sale of agriculture produce and debited in the books of a concern, royalty paid on account of publication, incentives in kind or cash paid on account of extra sales or bringing extra business, payments made on account of repair of machinery and plants, payments on account of franchises, payments in the form of gifts taxable as income in the hands of recipients etc.

9. Non-Intrusive Survey, help of AADHAR etc.

The concept of non-invasive survey should be implemented on a large scale without laying unnecessary emphasis on collection of taxes. National Population Register (NPR) data base and AADHAR information can be used in this respect. Search and seizure operations should be limited to cases where hard core tax evasion is suspected.

10. Tax Amnesty

There are conflicting view-points in favour of tax amnesties. However, innocent mistakes made by the taxpayer should be differentiated and given a treatment that enables them to correct errors without their being drawn into disputes or harassed.

11. Need for Integrated and Joint Audits

There is also a need to integrate audits in indirect taxes. Currently, in the CBEC, audit is undertaken for each tax separately even though the business and financial records verified during the audit are common for all the three taxes administered by the CBEC. There is need to integrate the audit of assessees and this is eminently feasible when a specialised audit organisation has been set up. This will not only substantially reduce inconvenience and compliance cost for taxpayers, it will also improve the quality of audit as the audit teams will be able to take an integrated view of the business. There is also need for the CBEC and CBDT to work towards joint audits in large cases.

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