Indian Tax Structure: 10 Dos & 10 Don'ts

By Subhash LakhotiaTax and Investment ConsultantTax Guru : CNBC Awaaz

Should Income-tax Law be abolished and replaced by Banking Transaction Tax?  In case it is found not to be feasible then at least the following ten point programme can be implemented by the new Government at the Centre which would provide relief and satisfaction to the tax payers on the one hand while on the other hand it would increase the tax revenue for the country.  Here is what requires to be done now :- 

1. The tax laws of the country should be made really very simple so that common tax payer can understand it. The ideal situation would be the drafting and redrafting of the Income-tax Law which could be understood by our Members of Parliament.  Time to think why not we have a real simple and not too lengthy Income-tax Act which could be chewed and digested by all.  This would mean better compliance and better tax collections.  

2. Too often tax amendments should be avoided.  This leads to faulty tax compliance as the tax payers are not aware of the latest amendments.  The Income-tax Act, 1961 was amended 113 times, thus not a single person can be found who will know the updated amendments to the Income-tax Act.  Every year while the Finance Bill is presented each year there are 60 to 80 or may be more tax amendments which means that during 5 year tenure of the elected MP there are at  least 300 to 400 tax amendments. With so many tax amendments how can you expect the tax payer for better legal compliance.  In addition to this, innumerable tax amendments round the year can be seen in Income-tax Rules.  These should be cut down for better compliance.

3. In case the Income-tax Law is not possible to be scrapped, then at least let there be drastic cut in Income-tax Rates for individuals which would surely result into heavy unprecedented tax collection.  While I travel in different parts of India and personally meet lakhs of tax payers every year I feel that if individual Income-tax rates are kept at 10% to 15% then there would be very good tax collection perhaps never seen in the past and also there would be elimination of black money transactions.  GDP ratio would be fine.  At least the government should try this for one year and see the results of tax cut.  Exemptions to be scrapped.  Life would be easy.  

4. The Corporate Tax should be 15% to 20% only and MAT and Dividend Distribution Tax as also cess and surcharge should go.  Higher tax collection, more and more foreign enterprises would be happy to do business in India, employment would increase.  The provisions of Transfer Pricing and GAAR should be scrapped.        

5 Income-tax Refunds should be granted within 60 days of filing Income-tax Return.  The interest to be paid for delayed refund should be at par with the interest charged by the government for delayed tax payment.  Hence, there should be parity in interest payment and interest receipt by a tax payer from tax department.   

6. Salaried employees are the worst to suffer.  Hence, the salaried employees may be taxed at a flat rate of 10% and no deduction or exemption for any type of perquisite.  

7. Age old useless, irrelevant and illogical tax provisions should be scrapped from the Income-tax Act.  One such provision relates to section 64 of the Income-tax Act whereby if a married lady receives any gift from her husband or from her father in law and mother in law, then clubbing of income will take place.  What a peculiar tax provision ?  Reversely if the same married lady were to get divorce from her husband, then she gets 50% of the assets of the husband with no clubbing of income.  The law of clubbing should be amended. 

8. Long time back in India, minor children were treated as a separate tax entity.  Now the income of the minor is clubbed, hence the Income-tax Law to be amended to provide for separate tax assessment of the income of the minor which will also provide for safety and security of minor child. 

9. To solve the housing problem in the country, the Income-tax Law should permit investing in more than one residential houses to save tax on long-term capital gains. 

10. A senior citizen can invest in tax free bonds without any upper limit.  Why then there is need to put a cap for a senior citizen in investing in Senior Citizens Savings Scheme ?  At least for senior citizens the law should permit investment for saving capital gain not merely in his name but in the names of other relatives for smooth succession planning. 

In the end I feel that any political party which wants to come to power in the next Lok Sabha elections should always keep in mind the theme of TERA – DUKH – MERA from the perspective of tax paying public of India.  In brief what is now needed is a holistic tax reform to aim at providing a simple and easy tax regime for the tax payers and which would help in the process of tackling black money and tax evasion. 

The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R.N. Lakhotia & Associates & The Strategy Group.