T N Pandey: Take taxpayers into confidence on reforms

TAXING MATTERS

The country is having an euphoria of tax reforms ever since the Budget 2004 was presented. Finance Minister P Chidambaram in his Budget speech projected himself as "votary of tax reforms".

Since then announcements have been made by both Prime Minister Manmohan Singh and Chidambaram that such reforms are coming in a big way through the Budget proposals for 2005.

This was reiterated by Chidambaram in the annual general meeting of Ficci. Again, the newspapers of December 30 were replete with the finance minister's announcements about tax reports.

These reports show that in the Budget, which the finance minister will present on February 28, there will be several proposals concerning the tax system reforms, which will be aimed at:

Simplifying the system for both direct and indirect taxes and at the same time ensure that it generates revenue;

Bringing in radically different tax system;

Increasing the tax growth ratio beyond 11 per cent from 9 per cent

Raising of savings;

Attracting investment in all sectors, like agriculture and infrastructure;

Quickening banking reforms;

Monitoring inflation and management of money supply;

Turning savers into investors

Widening the tax-net; and

Ensuring that nobody, who has potential to pay taxes, escapes doing so

The announcements sound nice and give a hope of a better future. But regretfully, the country is not being taken into confidence, as to what exactly the proposals are going to be, which will achieve the aforesaid objectives.

More than five months have passed since the Budget 2004 was presented and repeated announcements have been made regarding tax reforms, but the Prime Minister and the finance minister have been merely talking in abstract terms about the proposed reforms.

It is not understandable why the cards relating to reforms are being kept close to the finance minister's heart and are not disclosed publicly so that the proposals could be seen and debated by those also, who are going to be affected by the new tax measures contemplated by the tax reforms process.

A government, which swears by transparency in the administration, is supposed to come out clearly on what it has in mind concerning improvements in the tax system. Unfortunately, it is not being done and merely announcements are being made.

It needs to be appreciated that more than the government, the effect of the tax system is felt by the people, who have to comply with the tax laws and bear the brunt of taxes. To make the system work successfully, views of taxpayers must be taken into account. One-sided tax reforms can never succeed.

The government should learn from the experience. In the last few years, umpteen tax measures had been introduced through the Finance Acts, but the same were found unacceptable by taxpayers, and, therefore, many of these had to be 'rolled back'.

So much so that the finance minister, who had initiated the proposals was called the "rollback" finance minister. Such situations arose because of one-sided decision-making regarding tax proposals.

There seem to be no ground why the proposals that the finance ministry is contemplating for ushering in tax reforms to achieve these objectives should not be made known in advance for the consideration of taxpayers, tax economists, tax consultants, academicians, trade and commerce, chambers trade associations and others who have interest in the tax system. The tax laws that would emerge after such discussions will bring in true tax reforms.

There cannot be any element of secrecy in such proposals. The tax brackets and rates can also be disclosed for discussion in advance, as the same come into force from the next year.

Even proposals concerning central excise and Custom duties (barring the rates, which come into effect immediately) can be published in draft form before being incorporated in the Finance Bill. It is high time that the veil of secrecy from Finance Bill proposals is lifted so that meaningful discussion regarding tax reforms can be done.

In this context, a reference to the functioning of the Carter Commission in Canada for suggesting major reforms in the tax system can provide an idea about the realistic approach in such matters.

The Canadian tax reforms passed through three major stages. In the first stage, the tax system was studied by a group of tax and public finance specialists, who furnished six volume reports, providing a blue print of tax reforms, to be carried out.

Thereafter, a white paper was published, containing the government's proposal to tax legislation. After the parliamentary debate on white paper, the Bill for amendment was drafted.

Hence, to have meaningful reforms, it is necessary that a white paper of what the government proposes to do, should be published. Since there is not much time for this before the presentation of the Budget for 2005, only urgent reform measures should be mooted through the Finance Bill.

Other suggestions concerning tax reforms should be enacted through an income-tax (amendment) Bill after taking into account the views and suggestions on the white paper.

Only after such an exercise has been carried out, meaningful tax reforms can be done. A one-sided and hurried approach to tax reforms will be a futile exercise.