Economy

KEY POINTS

Loopholes & Reform measures

·         Individuals – The present tax law does not require filing of returns if the income is below the taxable threshold (Rs. 2.5 lakh).

·         This means that many professionals who can easily manipulate their accounts never appear on the radar of the taxman.

·         The law should mandate filing of returns by all professionals and proprietorship businesses regardless of their profit.

·         This will increase compliance by enabling the taxman to scrutinise suspicious cases.

·         There is also a re-introduction of the wealth tax since the wealth level is harder to manipulate and the tax is harder to evade compared to income.

·         Companies – The tax law allows offsetting of past losses against future profits for companies and the definition of admissible expenditures in the law are susceptible to easy manipulation.

·         These provisions are widely misused by corporates by claiming bogus expenses, to artificially reduce their profit and hence their tax liability.

·         A large number of companies showing negligible or no profit points to a continued prevalence of shell companies and other dubious structures which require systematic investigation.

·         Moreover, the numerous tax exemptions also come in handy for tax avoidance and big corporates benefit more from these exemptions.

·         Consequently, smaller companies face a higher effective tax rate compared to larger corporates which makes the tax regime regressive.

·         Administration – There is also a need to enhance the deterrence power of the law, which depends on the likelihood of punishing tax evaders along with imposing a fine.

·         At present, the Income Tax Department has a very poor win rate before the appellate tribunal and the higher judiciary and the law does not bite enough to hurt the tax offender.

·         The odds of punishing the offenders can be increased by integrating the GST, the income tax and the Ministry of Corporate Affairs’ databases.

·         These measures will go a long way in deepening the tax base among high-income groups and professionals.

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