Coronavirus impact | I-T Dept officials propose 10 main ways to boost tax revenue

Taxing the wealthy:
The officials have proposed a higher tax regime for ‘super rich’ tax payers. The surcharge on the super-rich had recently been raised in Union Budget 2020-21, which, they peg, is expected to generate a mere Rs 2,700 crore to the exchequer. They have proposed that this segment be taxed through two alternative means both of which can be imposed for a limited, fixed period of time. One, raise the highest slab rate to 40 percent for those total income above Rs 1 crore from 30 percent at present; and two, re-introduce wealth tax for those with a net wealth of Rs 5 crore.

Tax India income of foreign companies: Another major recommendation is to increase surcharge paid by foreign companies on income earned from their Indian branch offices or permanent establishments. At present, a surcharge at the rate of 2 percent is levied on foreign corporations if their net income is in the range of Rs 1 crore to Rs 10 crore, and at 5 percent on incomes exceeding Rs 10 crore.

“The said surcharge has not been revised from long time. With companies operating in India and deriving profits through their permanent establishments, it is time that a flourishing market like India, with its huge prospects, flexes its customer base muscle,” the report, a copy of which is in Moneycontrol possession, stated.

COVID relief cess: Imposition of a cess may help mobilise additional revenue as it will be levied on every taxpayer. Currently, the government levies a health and education cess of 2 percent each. The officials have proposed an additional one-time ‘COVID Relief Cess’ of 4 percent to help finance capital investment. They peg the extra revenue mobilised on this account to be anywhere between Rs 15,000 core and Rs 18,000 crore. To mitigate the extra hardship on the middle class, they propose that the cess be made applicable only in cases where the taxable income is greater than Rs 10 lakh.

Mobilisation of CSR funds for COVID relief: The report authors feel that tax incentive for corporate social responsibility (CSR) activities be extended during this ‘national disaster’. They propose that companies undertaking coronavirus-related relief activities under the CSR ambit be allowed to claim the expenditure incurred as a business deduction under section 37 of the Income Tax for FY21 only. This incentive will help mobilise CSR funds for disaster management.

However, they want the coronavirus-related relief activities be specifically defined u/s 2. They suggest amendments to section 2 and 37.

Another suggestion under this head is to allow corporates to treat salaries paid to non-managerial staff during the COVID-19 crisis as part of their obligation under CSR.

They also call for donations to the Chief Minister’s Relief Fund from the CSR fund of corporates be treated at par with the PM CARES Fund as requested by several state governments. “Contributions to PM CARES Fund and CM Relief Fund should be allowed to be counted as CSR not only for the current fiscal but for FY22 as well,” the report stated.

They propose a one-time opportunity to companies to contribute a portion of their unspent CSR funds till FY20 to the PM CARES Fund and utilisation of a portion of such unspent money for business purposes. They feel companies should be allowed to transfer a part of these unspent funds to the PM CARES Fund within a prescribed time, say by June 30, and be allowed to release a part of these funds for their business purposes.

New tax saving scheme like coronavirus savings certificates on the lines of NSC The officials call for creation of a new tax savings scheme to mobilise funds for coronavirus relief, wherein individuals and Hindu Undivided Families (HUFs) can be offered an additional deduction for investments up to Rs 2.5 lakh made in this fund in line with that made u/s 80C. The amount invested will have a lock-in period of five years and will generate interest income for investors in line with what the government pays for various small scale saving instruments.

They recommend amendments to Section 13A and 13B of the I-T Act to allow political parties and electoral trusts to invest in the aforementioned fund.

New amnesty scheme for collection of undisputed demands The Vivaad se Vishwaas Scheme 2020 only covers demands under dispute. However, a large part of outstanding demand pertains to those which are crystallised and for which no dispute exists. In order to incentivise collections, they propose an amnesty scheme waiving off interest u/s 220(2) of the I-T Act in part or in full. A similar approach can also be adopted for undisputed penalty amount pending for collection.

Here’s a list of the medium-term measures:

Reintroduction of the Inheritance Tax: Inheritance tax is levied mostly in developed countries, with rates as high as 55 percent. In India, it was in force till 1985 and was payable on a slab basis and ranged from 10 percent to 85 percent. The authors of the report have proposed reintroduction of Inheritance Tax to reduce concentration of wealth, widen the tax base enhance revenue, and help bridge the wealth inequality divide. Such a tax, they feel, may eventually lead to reduction in tax rates. Earlier, procedural issues and information asymmetry led to the tax being abolished. “However, in today’s digital age, information is easily accessible and with improvements in administrative framework over the last few decades such a tax is enforceable and implementable now,” the report said.

Raise capital gains to 10% on overseas Indian citizens:
They propose raising the capital gains accruing out of inherited properties of OCI (Overseas Citizenship of India) citizens be raised by 10 percent from 30 percent and 20 percent from short and long-term gains at present, respectively. Buttressing their argument, they explained: “The reason being that at various stages in the life of an OCI, the inherited properties and persons holding them would have benefitted from the facilities and subsidies offered by the Government of India.”

Rationalisation of equalisation levy: Equalisation levy, also known as ‘Google Tax’, was introduced by the Finance Act, 2016 on certain ‘specified services’ of certain non-resident businesses, largely those providing advertisement space and services. Such revenues are currently taxed at 6 percent on a gross basis. The Finance Bill, 2020 proposes to expand the scope of this ‘equalization levy’ to include consideration received by e-commerce operators from e-commerce supply or services, and taxed at a rate of 2 percent.

Officials are of the view that companies operating during the coronavirus pandemic are largely digital/online/e-commerce entities. The report cites consumption of online services, especially web streaming services, such as Netflix and Amazon Prime and Zoom, and stated that increased dependence on online commerce has made this sector flourish.

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“The increased business of these e-commerce/online streaming/web services companies provides an opportunity to increase the said tax rates by 1 percent to 7 percent for advertising services, and to 3 percent (from 2 percent earlier) for e-commerce companies,” the report stated.

The equalisation levy collection for FY19 and FY18 was Rs 939 crore and Rs 550 crore, respectively. They peg the increase in the tax rate to contribute “a good amount of increased revenue” and since the levy is not part of the I-T Act it would not be subject to the provisions of tax treaties signed with other countries.

Give It Up campaign: Just like the ‘give it up’ campaign on LPG subsidies where many well off people voluntarily surrendered their LPG subsidy benefits, the tax department can encourage the super-rich and those willing to give up at least one tax subsidy/tax deduction/tax concession for a year. For example, an individual could voluntarily opt for giving up his/her 80C deduction for a year.