T N Pandey: Scrap one-by-six scheme

CHAT ROOM

What is exemption from tax on capital gains, provided for compulsory acquisition of farm land in the Finance Bill, 2004-05?

The existing provisions of Section 45 provide for charging to tax the capital gains arising from transfer of farm land situated within specified urban limits.

It also provides that where transfer of such land is by way of compulsory acquisition under any law or where the consideration for transfer of such land is determined or approved by the central government or the Reserve Bank of India, capital gains so arising is chargeable to tax as income of the previous year in which the compensation or enhanced compensation or consideration is received by the assessee.

Pampered farmers, who are immune from paying any income tax, made noises about the taxation of capital gains in the above situation. Accepting their pleas, Finance Minister P Chidambaram has decided that the hardship arising to farmers by such taxation needs to be mitigated and hence a provision (clause 5) has been inserted in the Finance Bill (No 2), 2004 to provide by way of clause (37) in Section 10 of the Income Tax Act, 1961, that the capital gains arising to an individual or a Hindu undivided family from transfer of farm land by way of compulsory acquisition where the compensation or the enhanced compensation or consideration, as the case may be, is received on or after April 1, 2004 shall be exempt.

The exemption is available only when such land has been used for agriculture during the proceeding two years by such individual or a parent of his or by such Hindu undivided family.

The proposed amendment will be effective from April 1, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent years.

On the principle of "ability to pay", there is no justification for giving the exemption and no hardship (as presumed) is involved in taxing such gains. A person, who derives gain by compulsory acquisition of his land can certainly part with some portion of it for the benefit of less well placed citizens in the country.

A shocking state of affairs has been noticed from paragraph 96 of the Budget speech of the finance minister. The figures regarding taxpayers given in this paragraph show a pitiable state of affairs regarding the efficiency of the income tax department.

According to the finance minister, only 34 million people (in a population of nearly 1.10 billion) file income tax returns. Of these, only 27 million are taxpayers. This means 7 million people are filing returns without paying a single rupee by way of tax.

Of the27 million, 14 million are expected to go out of the tax net after the passing of the Finance Act, 2004 because of the decision that persons up to income of Rs 100,000 will not be required to pay any tax. This means in future there will be only 13 million people paying tax. What can be done to improve the situation and increase the number of taxpayers?

The query requires extensive well reasoned comments, which is possible because of the constraint of space. Here is a brief reply to the question.

The "one-by-six" scheme, which is generating substantial infructuous work for the income tax department is the basic reason for this shocking state of affairs. The 7 million people, who are filing returns and paying no tax is largely the outcome of such a scheme conceived by the previous finance ministers.

The number is going to increase further because of the proposal that though persons up to income of Rs 100,000 will not be liable to pay any income tax, still they will have to file the returns of income.

What the department is going to do with such returns has not been mentioned. The returns, thus, generated along with those filed under the "one-by-six" scheme is going to cost lots of money to the income tax department as cost involved in getting such returns processed and stored.

Further, considerable man power will be required to handle such returns, which can be, otherwise, usefully used in devising ways and means to identify tax evasion/avoidance tactics, pursue investigation in cases where substantial revenue/evasion is involved and make quality assessments.

So far no information has been published by the tax department to show that big revenue yielding cases have come to light by processing of returns showing non-taxable income, filed under the "one-by-six" scheme.

Further, in the present age of advanced information technology, the income tax department need not call for income tax returns to find out who are (i) owners of houses (ii) having telephones; (iii) car owners ; (iv) have credit cards; (v) have traveled abroad; and (vi) are members of clubs. For finding out non-filers of returns, the "one-by-six" scheme is a crude device, which does not seem to have yielded results commensurate with the efforts put in.

Hence, to increase the number of taxpayers, I suggest:

Scrap the "one-by-six" scheme;

Drop the proposal that those persons, whose income is up to Rs 100,000 shall file the returns despite the fact that no tax will be payable by them;

Work out scientific ways for detecting non-filers of return in time with advanced functioning and by internal and external surveys;

Provide for exemplary deterrence for those, who fail to discharge their tax obligations;

Devise a system for quick disposal of prosecution cases of those, who have concealed particulars of their income or furnished inaccurate particulars thereof; and

Develop a system of recognising prominently the taxpayers, who discharge their tax obligations honestly and sincerely.

Only such schemes can increase the number of effective taxpayers.