Income Tax Reforms

08-Aug-2022: Income Tax Reforms

Income Tax being the major source of direct & personal taxes, is a very complicated system and has many hassles to while complying to it. This is one of the many reasons why people get discouraged and shun it. What is more astonishing is that in the name of “Simplification & Rationalisation” the IT Dept only complicates the system further. A classic example is the ITR-2 form which runs into 41 pages.

Here, I take the opportunity to suggest some basic ideas which may cut down the complicity of this system. These may look too simplistic, but have great comprehensive nature. Let’s see:

1. Our Financial Year is from 01-Apr to 31-Mar next year. Let’s simply make it the calendar year- 01-Jan to 31-Dec. This will remove great confusion about 2020-21, 21-22, and things like that. This suggestion was given by me in an article way back in 2012. And the GoI wanted to implement this feature in 2017-18, but later it was postponed indefinitely, don’t know why.
2. The concept of Financial Year (FY) and the Assessment Year (AY): these are coined because, what you earn in an FY has to be declared and paid tax in the next year named AY. But I say why the confusion? In any case when you enjoy any service in one period, you compensate it in the next period. Ex. House rent. The only exception is the Insurance premiums which need to be paid in advance. Well, what I suggest is to keep only “Financial” or “Accounting” Year nomenclature and while declaring & filing, just refer to the FY. Simple. It would reduce confusion.
3. The Rounding Off of the final figure to nearest Tens is now redundant because, the computer system has taken over for payment, refund etc. Earlier, small changes currencies were a problem physically. It will reduce system time.
4. The conception of Nominal (ex- in rents, etc.) and Accrual (ex- in receipts). These are imaginary figures, which may change from time to time. Also, taxing something which one has not “earned” but likely to earn because it has become due to him, is not a sound idea. It creates a lot of calculation which may change later when it is finally received at the hands of the Tax Payers. Then there is the chance of duplicate calculation when actually paid. These concepts need to be removed.
5. Double Taxation: For example, the MF AMCs pay dividend Tax to the exchequer, and again the Dividend is taxable at the hands of unit holders. For simplicity one of them must be removed- preferably the retail unit holders’.
6. TDS is another area of improvement. Though the GoI has enhanced the threshold limits, they are still less. For NBFCs & MF Dividend it is still a meagre amount- Rs. 5000 & Rs.4000, respectively. The following are the suggestions for the limits:
• Bank Interest for Senior Citizens: Rs. 1 Lakh, in a year
• Bank Interest for General Citizens: Rs. 80 K, in a year
• NBFC Interest: Rs. 50 K, in a year
• MF Dividend: Rs. 40 K, in a year
7. TDS, again: The IT Dept deducts TDS and finally, after the ITR filing determines the Tax liability, it refunds the excess TDS. Now it is seen that the TDS refund is more than 50% of the TDS collection. It means that the valuable resources are utilized during collection & refund, apart from the time delay outweigh the gain in tax receipt. It should be so adjusted that the refund be not more than 20% of the collection.
8. About the PAN Card: The Govt. says that PAN is invalid if not linked to Aadhaar. Well, then why not discard the PAN altogether and work with only Aadhaar. This will reduce a lot of paper work, risks, etc.
9. And finally, let me suggest the IT rate for taxable slabs:
• Up to Rs. 5.0 L – Nil (General), Rs. 7.5 L (Senior Citizens), 10.0 L (Super Senior Citizens),
• From Rs. 5.0 / 7.5 /10.0 L to Rs. 10.0 L – 10% plus the Lower Slab Amount,
• From Rs. 10.0 L to Rs. 20.0 L – 20% plus the Lower Slab Amounts,
• From Rs. 20.0 L to Rs. 50.0 L – 30% plus the Lower Slab Amounts,
• From Rs. 50.0 L to Rs. 1.0 Cr – 40% plus the Lower Slab Amounts,
• Above Rs. 1.0 Cr – 50% plus the Lower Slab Amounts,
• There shouldn’t be any surcharge over & above this.
10. Example: If one has an income of Rs. 1.2 Cr per annum, then the tax liability will be: 50K + 2L + 9L + 20L + 10L = Rs. 41.5 L (about 34.6% of the Taxable Income).

With these suggestions, I hope the Tax compliance will greatly improve. What do you say?