PremiumOverall, the government has not moved away from the reform path in direct taxes. But it has missed an opportunity to make the tax system simple and clear, the vision enshrined in the original Direct Taxes Code.
Good job on direct taxes, but a mess on customs duty
“I wish to see a day when the FM would rise to say I have no new tax proposal", quipped a top bureaucrat who was nominated to the Rajya Sabha years ago. Finance minister Nirmala Sitharaman has come close to fulfilling such a wish. The budget has steered clear of fresh direct tax proposals, except for making the tax treatment of digital assets clear.
There has been no tinkering with income exemptions and deductions that clutter the tax system. There was much speculation that the government would raise the standard deduction for salaried employees and double the tax-exempt savings limit. Remember, sops could well be reserved for the next budget, which is the penultimate year before the general elections. Nevertheless, a stable tax regime offers comfort to investors and taxpayers.
Proposals to reduce litigation -- such as a one-time window to correct omissions -- make sense. This is not an amnesty scheme. Taxpayers can file an updated return within two years from the end of the relevant assessment year, paying an extra amount. But India’s taxpayer base is way too low, with some few thousands declaring income over ₹1 crore. It must be widened. The best course is to deploy big data analytics and diligently follow the audit trails created by the goods and services tax. This will bring many unorganized traders under the income tax net.
The not-so-good news for taxpayers is the retrospective change in the income tax law. The finance bill says that the health and education cess on income and profits will not be allowed as a business expenditure from 2005. It simply means the change is not prospective.
Separately, the clarity offered on the tax treatment on transactions of virtual digital assets such as Bitcoin and Ethereum is welcome. Income from the transfer of any virtual digital assets will be taxed at the maximum marginal rate of 30%, but losses from the sale of digital assets cannot be offset against other income. It is akin to the tax rate on winning, say, from lotteries.
India Inc. should be relieved. No extra taxes; rather, more relief for companies that pay a lower 15% corporate tax rate due to the pandemic. Also, the proposal to cap the surcharge on long-term capital gains from the transfer of any kind of assets (and not just on listed equities and units) at 15% is a good idea. This would make exits from start-ups easier.
The government wants to fight tax evasion. That is legitimate. So, the errant ones will not be allowed to set off any loss against undisclosed income detected during search and survey operations. But search-and-surveys themselves are blunt and archaic instruments in law enforcement. Nabbing evaders calls for intelligence and creative use of information technology, instead of searches and seizures.
Overall, the government has not moved away from the reform path in direct taxes. But it has missed an opportunity to make the tax system simple and clear, the vision enshrined in the original Direct Taxes Code.
The changes in indirect taxes go against the grain of reform. Customs duties have been hiked on several products ranging from umbrellas to smart meters. The government claims that many duty exemptions, extended over three decades, for capital goods in assorted sectors such as power, fertilizer, textiles, leather, footwear, food processing and fertilizers stifled the growth of the domestic capital goods sector. Ditto for project import duty concessions. The plan is to raise duties gradually to 7.5%.
But then, a few exemptions have been introduced on inputs such as specialized castings to encourage domestic manufacturing of capital goods. Don’t exemptions clutter the tax system? Would there be checks to ensure that there is no contrived value addition (as had happened earlier in mobile handsets). A more rational approach is to have a low uniform duty across the board so that one line of production is not privileged over another.
Budget numbers show a 10% growth in gross tax revenue in 2022-23 over the revised estimates of 2020-21. Direct tax receipts are projected to grow by 13.6% and indirect taxes by 5.6%. The government says the move to lower excise duty on products has lowered indirect tax collections. The tax to GDP ratio is estimated at 10.7% for the coming fiscal. It must double. Bringing petro-products under the goods and services tax could significantly raise revenues.
Over to the GST Council.
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