T N Pandey: Chidambaram's Budget fails to correct flaws

TAXING MATTERS

In paragraph 96 of the Budget speech for 2004-05, Finance Minister P Chidambaram said: "No one, with taxable income of Rs 100,000 will be required to pay any income tax any more. However, I am unable to alter the tax slabs because I cannot afford to lose a large amount of revenue at a time when the government has assumed a larger responsibility for investment and welfare programmes.

"Of the 34 million people filing Income-tax returns, only 27 million assesses are taxpayers. My proposal will give relief to 14 million assesses. The method that I have adopted is somewhat novel. While every one will file his return according to the current tax slabs and tax rates and compute his taxable income and the tax payable, any one with a taxable income of Rs 100,000 will have his income tax liability automatically rebated. I cannot give more relief across the board in this Budget. If compliance improves, I promise to revisit the subject".

On first blush, the impression that one gets is that the basic exemption limit has been increased from Rs 50,000 to Rs 100,000. But this is not so. The exemption limit continues to be Rs 50,000. The excess over this amount up to Rs 100,000 only gets rebated - not exempted. Further, this announcement does not benefit senior citizens in any way.

The next issue pertains to the requirement of filing the returns even by people, whose income up to Rs 100,000 gets rebated in terms of proposed Section 88D and whose tax liability is going to be nil.

Why such people file the returns when nothing is to be realised from them by way of tax is the moot question. Getting returns from such people will only increase handling costs for the government and will require time and attention of the manpower of the income tax department, which need to be usefully used for catching tax evaders and probing into their cases ""not for processing and storing infructuous return forms.

If the objective is to keep a track of such cases, then the method devised is crude in the present day highly advanced information technology.

Such a scheme will continue to be bother taxpayers as they will be required to file the returns without paying a single rupee by way of tax. The savings in tax will be lost by paying the fees to consultants for preparing the returns.

Further, there is no provision for giving a marginal relief. Thus, if a taxpayer's taxable income is Rs 101,000, the tax required to be paid will be Rs 9,200 plus the 2 per cent education cess (Rs 9,384) though the income over Rs 100,000 is only Rs 1,000. This, prima facie, is anomalous and will induce people to limit the income up to Rs 100,000 and encourage tendency for evasion.

Some other issues concerning personal incomes, which are primarily unjust, have not been given due attention by the Budget makers. The first is about the number of taxpayers.

According to the minister's figures, the number of effective taxpayers, after the rebate to persons up to Rs 100,000, will get reduced to 13 million. Why should such a small number of taxpayers be subjected to meet the expenditure of the welfare and various needs of the entire population and also be made to contribute the 2 per cent cess (additional tax) for the advancement of education.

Such situations are a great disincentive for honest taxpayers, who wish to be good citizens and discharge their tax obligations as a national duty.

An important issue is the tax department's inability to increase taxpayers' number, which is only 13 million in a population of over 1 billion. The minister has done nothing by his Budget proposals to increase taxpayers' number though there was much talk before the Budget presentation that the government would crack down on tax-evaders.

All that the minister has done is to whip the same horses again and again without making any attempt to add new ones. This is a retrograde policy that diminishes the desire to make voluntary compliance.

Another unjustified levy relates to personal taxation and 10 per cent surcharge on those, whose income exceeds Rs 8.50 lakh. This is a prima facie, unfair when one compares it with the surcharge payable by artificial judicial persons like firms in whose case the surcharge rate is only 2.5 per cent.

The disparity is discriminatory and unexplainable. There could be no ground to impose a 10 per cent surcharge on earned incomes of individuals and subject the companies to a surcharge of 2.5 per cent only.

This surcharge was imposed by the previous finance minister but it was expected that he would review the arbitrary levy and either withdraw it or at least bring it at par with the surcharge payable by the companies and other taxable entities. This has not been done.

On the contrary, a 2 per cent additional tax will be payable by such taxpayers. The minister should consider whether taxing efficiency this way is proper?

Exemption from income tax on the family pensions received by widows, children and nominated heirs of members of the armed forces and paramilitary forces killed on duty is welcome. But this is going to be merely cosmetic as very few people will be there, who receive family pensions exceeding Rs 100,000.

Starting the speech concerning the Budget proposals relating to direct taxes, the minister said taxation was a key tool of fiscal policy, but such a tool would be ineffective if the same was merely cosmetic.

Likewise, mere moderate tax rates cannot enthuse taxpayers to make compliance if seemingly there are provisions in the law, which are apparently unfair.

From these angles, the so-called "dream budget" is disappointing and not only it fails to address the existing problems but also fails to correct the aberrations that were already in the law.