Less taxing times

BS OPINION

A massive 10 per cent of all taxes are refunded to taxpayers every year (that's around Rs 25,000 crore), and anywhere between 7 and 10 per cent of this amount is typically paid to expedite the process of refunding, which could take up to a scandalous 10 months.

While Finance Minister Jaswant Singh's Budget has sought to tackle this by doing away with the current manual system of processing such refunds "" responsible for both the delays as well as the speed money "" several problems remain.

There are 182,000 tax appeals pending before the taxman, and it takes an average of two years for an appeal to be disposed off.

The situation is as bad when it comes to cases of compounding tax offences, where 27,000 are still pending because the rules for compounding are so onerous.

This is what Mr Singh is now trying to address by setting up a National Tax Tribunal and 50 additional benches of the Income Tax Appellate Tribunals (ITAT), and through simplification of the rules for compounding.

Special incentive schemes are also to be devised to withdraw cases if people pay a nominal penalty. A tax ombudsman is to be appointed, and all existing court cases will be transferred to the national tax tribunal.

How complicated things are today can be judged from the fact that there are several cases where different courts have ruled differently on essentially similar cases.

With such measures designed to make the tax system less onerous for the honest taxpayer, and with the proposed Tax Information Network (TIN) being set up, tax collections (as Mr Singh said at the conference of chief commissioners of tax) are certain to spurt.

Right now, India's tax-to-GDP ratio is under 10 per cent, compared to 25 per cent in countries like even Brazil and Argentina.

Much of this difference is, of course, due to what economist Surjit Bhalla calls the problem of the 'missing middle' "" namely, that tax compliance ratios for taxpayers with an income of between Rs 2 lakh and 5 lakh has been falling over the years.

For those in the Rs 2 lakh to Rs 3 lakh income range, for instance, compliance ratios fell from 22 per cent in 1988 to 3 per cent in 2001.

Mr Singh, though, did blot his record somewhat at the tax commissioners' meet, when he spoke glowingly of how India's foreign exchange reserves would soon touch $100 billion.

Far from being a sign of India's strength, such bulging reserves can be a sign that key economic policies are not right. The reserves are also a huge tax on the economy.

While the country pays an average of 8-10 per cent interest to attract some of these reserves, much of the reserves are parked in US treasury paper that yields under two per cent annually.

That's an annual 'tax' of perhaps as much as $4 billion being paid by the economy each year "" an amount that's higher than the FDI inflows into the country each year.

Reducing one type of tax, in the sense of making the taxation system less onerous, is welcome, but increasing the other is not.