T N Pandey: Where are the hard decisions?

Let me at the outset congratulate Finance Minister P Chidambaram for reverting to the old style of the Budget speech "" in three segments, dealing separately with economic issues, direct taxes and indirect taxes "" and not mixing the three in a common speech as was done by his predecessor while presenting last year's Budget. The new arrangement makes it easy to grasp and understand the various proposals covered by the speech.

However, having said this, I regret to add that the proposals, as far as direct taxes are concerned, lack direction. Most of these are of an ad hoc nature and do not take a consolidated view of the various issues that relate to such taxes.

In the matter of gift tax, for instance, the finance minister has gone only half-way. While taxing gifts from unrelated people exceeding Rs 25,000 is a welcome move because such gifts are generally used to launder one's own unaccounted income.

So, there is no justification for exempting gifts inter se from relatives as such gifts, too, are intended to avoid the incidence of tax and create numerous taxable entities to enable high income group people either not to pay any tax or pay the same at nominal rates. Why this should continue is an issue the finance minister needs to ponder.

For some time now, there has been considerable debate regarding the phasing out of the exemptions under the income tax law. Successive finance ministers have promised this change. The Kelkar committee had also made a strong recommendation for removing exemptions and concessions.

However, like his predecessors, Chidambaram, too, has not shown the courage to adhere to this avowed desire. He has phased out exemptions relating to the interest earned from a non-resident (external) account and the interest paid by banks to a non-resident or not-ordinarily-resident on deposits in foreign currency.

But, the finance minister has simultaneously introduced some more exemptions, such as for agro-processing industries; the continuation of additional depreciation under Section 32(1) (ia); 150 per cent deduction for research and development expenditure for the automobile sector; and a host of other benefits and concessions for power and other sectors.

The new deputy chairman of the Planning Commission has stressed the need for hard decisions. The Budget proposals concerning the exemptions do not display such a desire.

In the matter of capital gains, the decisions announced do not seem justified. The decision to subject gains on securities transaction tax at 0.15 per cent is basically against the philosophy of the Income Tax Act.

Such a step reduces income tax to the level of sales tax, which I feel is not permissible in terms of Article 265 of the Constitution. Income tax is basically a tax to be paid when one earns income. Under the proposed scheme, however, even people suffering losses will be required to pay tax.

Further, the rate of 0.15 per cent seems to be quite high. Some time ago, the Securities and Exchange Board of India imposed a turnover-based fee on market participants at the rate of 0.01 per cent for delivery-based transactions and 0.001 per cent for non-delivery-based transactions.

An additional 0.15 per cent, that is, 15 times more than the existing one for delivery-based and 150 times more for non-delivery-based transactions, may turn out to be a huge disincentive for entering into such transactions. How the capital market will react to this needs to be seen.

Further, a securities transaction tax is not expected to increase market efficiency. If the capital gains tax involves complexities, these need to be sorted out "" the tax need not be abolished. After all, the cure for a headache does not lie in cutting off the head.

No grounds have been given as to why short-term capital gains, which, at present, are taxed at the rates applicable to an individual, should be subjected to tax at the ad hoc rate of 10 per cent and why a win-win situation should be provided to tax payers for such fortuitous gains.

Similarly, exempting farmers from capital gains tax derived from the sale of agricultural land situated in certain urban agglomerations is prima facie unjustified. There is no reason why such unearned income should not be subjected to tax.

In the case of shipping companies, an option has been given to opt for the tonnage tax or continue with the present scheme of taxation. In view of this, the benefit of Section 33 AC needs to be continued for those companies that do not opt for the tonnage tax.

Some proposals in the Finance Bill that are worth appreciating are:

Exempting from tax, individuals whose income is up to Rs 1,00,000. However, making them file returns will not only mean unproductive work for them, but will also load the tax department with returns that will involve considerable handling costs without generating a single rupee by way of tax. In the present age of advanced information technology, such an exercise for keeping a watch on assessees seems primitive.

Exempting from income tax, the family pension received by widows, children and nominated heirs of members of the armed forces and paramilitary forces killed in the course of operational duties is a good gesture.

Extension of relief under Sections 80DD and 80U to people suffering from autism, cerebral palsy and multiple disabilities is a well-conceived move.

In Paragraph 95 of the Budget speech, Chidambaram has said that, being a "votary of tax reforms", he would attempt these in the next Budget. However, tax reforms is a much broader concept than making some changes here and there.

For a successful tax reform planning, pledge (commitment), perspective, perception, patience and perseverance is needed. Hence, this task should be entrusted to an expert body "" a tax commission headed by a Supreme Court judge with eminent people from the fields of economics, industry, accountancy and so on as members. And the changes suggested should be introduced by an Amendment Bill "" not through the Finance Bill, which has a time constraint.

(The author is former chairman, Central Board of Direct Taxes)