T N Pandey: Reforms should make tax laws easy to execute

TAXING MATTERS

of 29 October shows the anxiety of Prime Minister Manmohan Singh for tax reforms.

He is reported to have instructed Finance Minister P Chidambaram that in the next Budget focus should be on tax reforms. It could not be done in the first Budget of the United Progressive Alliance as the government had little time before presenting the Budget to address the issues concerning the tax reforms in a substantive manner.

Earlier, few weeks back, the Prime Minister in Mumbai had stressed the need for tax reforms and said comprehensive reforms would be carried out through the Finance Act, 2005.

The finance minister while presenting the Budget had projected himself as a "votary of tax reforms", which would be visited at the time of 2005 Budget presentation. Thus, the country could expect a heavy dose of legislation in the Finance Bill, 2005 for reforming the tax system.

It's first time that the Prime Minister is taking such an interest in the reform of the tax system. It is quite natural for a person, who initiated economic reforms as the finance minister in the nineties.

Chidambaram's penchant for reforms could be seen from his Budget proposals for 1997-98, where two important measures in the context of tax reforms were taken""introduction of the voluntary disclosure of income scheme (VDIS) and amendment of law for soliciting more tax returns on the basis of economic indicators.

It is another thing that because of ad hoc approaches, the VDIS was a failure in terms of adding new taxpayers and generating revenue.

According to the then revenue secretary, published in India Today of January 12, 1998 (Page 60), "most of the declarants are existing assesses - not new ones.

The extension of the scheme of filing returns on the basis of economic criteria resulted in thousands of infructuous returns coming to the income-tax department. According to Chidambaram's 2004 Budget speech, there are 7 million people who file returns, but pay no taxes.

The foregoing accounts regarding changes made in the income-tax law in the past show that no success has been achie-ved by making hurried and ad hoc changes in the law, rather they made the law more complicated, cumbersome and difficult to administer.

Hence, in carrying out tax reforms, great care has to be exercised so that the reforms achieve the objectives sought for and make the law simple and easy to administer. Several attempts made earlier through annual Finance Acts have failed to achieve these objectives.

Some suggestions for making meaningful tax reforms are:

There is hardly time (little more than three months) left now before the Finance Bill, 2005 is presented, to conceive, draft and include in the Income Tax Act any worthwhile tax reforms.

In this context, the observations by the finance minister in the Budget speech (supra) that tax reforms were not to be made in hurried or piecemeal manner and the Prime Minister's remarks that he was a cautious reformer are relevant and must not be lost sight of in carrying out any exercise for tax reforms.

Effective tax reforms cannot be brought in through Finance Acts as the same are drafted in a pre-fixed time schedule and Budget proposals are drafted in an environment of secrecy, because of which public or taxpayers' participation and discussion concerning such proposals is not possible.

Reforms cannot be carried out without visualising the purpose, for which these are to be carried out. Most important requirement for this is clarity about the purpose, perspectives and perceptions about the reforms proposed to be carried out.

For bringing about effective reforms, a white paper should be issued by the finance ministry, indicating:

A clear statement of policy to be followed regarding the reforms contemplated;

Details about the proposals concerning the tax reforms;

A theoretical model, explicitly relating to the tax cha-nges to the policy objectives;

An empirically supported statement of all initial and final conditions concerning the chan-ges proposed.

A clear enunciation of the economic, social and political impacts of the changes.

Besides these, it is also necessary to indicate what is sought to be achieved; and how it is to be achieved, which would include the implementation aspect.

Changes of a fundamental and structural nature should not be routed through the Finance Bills. For these, an income tax (amendment) Bill be presented, which could be discussed before the changes become law. Only urgent and routine amendments should be introduced through Finance Bills.

Finally, before introducing the Bill concerning reforms, a full-time commission, headed by a sitting or retired judge of the Supreme Court, with other technical persons to assist in (on the lines of the Wanchoo Committee) should be constituted to study the need for tax reforms and the areas to which these should extend.

Sufficient time should be given to such a body for making its report. Legislation for tax reforms should be undertaken on the basis of the report and discussions made concerning the same. Hurried action, as proposed, would not achieve the objectives of tax reforms.