10 steps to hassle free Income Tax regime

Background

Parliament has just passed a Black Money bill that deals with overseas assets and income. Our Finance Minister has promised another one for domestic Black Money. That makes it three laws to deal with Income tax alone. This can benefit people that depend on complex laws for a living such as accountants and lawyers but will be a huge drag on the economy. It will also add to India’s dubious reputation as a heavily regulated, bureaucracy infested economy that is hard to do business in. It will obviously frustrate PM Modi’s ambitious agenda of providing ‘sabka vikas’ or growth for everyone. If investment is subdued there can be no growth.

We are not just here to criticise, we can also offer useful suggestions. In that spirit here is a shot to do list for the Hon Finance Minister:

Ten steps to tax nirvana

  1. Flat, regionally competitive Corporate tax rate with almost no exemptions. We do not suggest competing with tax haven economies like Hong Kong. Perhaps a 20% Corporate profit tax with practically no exemptions other than for startups (first 3 years) and perhaps for green technology investment.
  2. Get rid of MAT. Makes absolute no sense at all.
  3. Get rid of either TDS for PAN transactions. It adds to paperwork with no benefit to anyone. If there’s PAN, there should be no need for TDS because the assessee will pay Advance tax if necessary. If he doesn’t there is always ways to go after him.
  4. Monthly tax payments Instead of quarterly advance tax, tax payers can be asked to pay monthly tax on estimated revenue for the whole year. It should be taxpayers’ responsibility to keep the tax in sync with income such that at end of year deviation is less than 10%. This will even out government revenues as well.
  5. Get rid of dividend tax there is no justification for taxing income again, discouraging incorporation of companies keeping huge sections of economy in the hands of unincorporated entities.
  6. Tax share market gains and all capital gains, including property gains at flat rate, preferably 20%. This should apply to everyone, be it FII, local investor, whatever. People don’t mind paying tax on windfall profits.
  7. Compete to keep laws simple Check out tax laws of highly competitive nations like Singapore, Hong Kong, New Zealand etc., and ensure our tax laws have as few sections as possible, if not lowest. There’s no need to setup committees with ten year plan, just copy and paste! There’s no patent on these laws!
  8. Clear, simple definition of what’s income and what’s allowed expense. If this is done there is no need for silly laws like Fringe Benefit tax because amount paid on behalf of someone become that someone’s income automatically. If my company pays my club fee, that is my income.
  9. Don’t tax foreign sourced income. Income earned outside India by resident taxpayers for services done from India should be tax free. This will encourage huge outsourcing market for Indian professionals (freelancers, small outfits) for everything from web design to remote support, remote training, software design, what not. This can be applicable to individual tax payers to start with. In addition, limits can be kept at reasonable levels, say US$100,000 per year. Remember, a lot of this income gets taxed overseas anyway thereby limiting what GOI can milk out of this.
  10. Introduce Estate tax but with high limits and reasonable tax. Say limit at Rs.5 crores and tax at 20-30% would be progressive, fair and exempt most middle class. It will also encourage meritocracy.

Hope our FM will consider these!

 

Black Money Bill – cure worse than the problem?

Loksabha has passed the so-called Black money bill. The formal short name is Undisclosed Foreign Income and Assets Bill. While no one can question the basic intentions behind the bill, it is sad this bill too follows numerous others that simply complicate the matter, don’t solve the problem and in fact make it worse in many ways.

Incidentally many of these points were also raised in an excellent speech by Deepender Singh Hooda, Congress MP from Haryana, during the LS debate on the bill.

Problems with the Bill

1. There is no need for a separate bill, IT Act is there already

There are over 85 sections, with numerous clauses and sub-clauses in the bill. This will delight many lawyers and Chartered accountants and ITOs but will be a nightmare for ordinary people. For all that, it accomplishes nothing that’s not already there in the IT Act or can be inserted in one paragraph.

Is it legal to not disclose income, whether local or foreign? Of course not! It is legal to hold assets in India or overseas out of income not taxed at all? Of course not! As Mr. Hooda rightly pointed out, such disclosures (and penalties) are already there since 2013. Then what good does this law do? Your guess is as good as mine!

2. Vaguely defined ‘satisfactory explanation’ clause gives ample scope for harrassment

The law says overseas assets held by resident taxpayers (NRIs thankfully exempt, but more on that later) for which ‘no satisfactory explanation’ can be given. Now who’s to be satisfied? ITO of course. What is ‘satisfactory’? No one knows.

Obviously for rent seeking corrupt ITOs, or those simply desperate to meet quotas and targets or earn promotions, it is very easy to issue a demand notice claiming to be unsatisfied. This is even for assets properly disclosed!. The poor taxpayer then has to fight the system or go to jail. At best he can waste months and years of effort, huge fees to accountants and lawyers before he can escape the law. And what penalty applies to the crooked officer that started the whole process? Nothing of course.

This is exactly how foreign investors end up with irrational, huge tax demands on MAT and other matters, often running into tens of thousands of crores of rupees (of which nothing is really collected) after years wasted destroying India’s investment climate, image and economic prospects. Once the law is there, the rules are, it will be physically impossible for any FM, however smart or well meaning, to stop abuse.

As with Section 498A and so many other laws, this will be misused to generate fees and bribe. And there will be no control other than goody goody assurances by the Hon Finance Minister which can be written in a sheet of water.

3. Big blow for NRIs, a community that supported NaMo consistently

Even though NRIs are exempt, many that plan to return to India will have to think twice. This is because a crooked corrupt ITO can simply dismiss their explanations and seek to levy 120% tax on whatever assets they disclose upon return, simply alleging he is ‘not satisfied’ with the explanation. And become a hero internally for standing up for the exchequer. Either you pay through your nose in bribes or be prepared for years of court battle.

Most of the income earned from such wealth is taxed somewhere or the other and it is likely to be eligible for double taxation relief. Most countries, other than few like Singapore or Hong Kong that attract legitimate wealth through well run capital, property and other markets, have high tax rates. This means, nothing much will flow to the Indian Government anyway. This is because such tax is only due if the tax paid overseas is less than Indian taxes.

4. Easy for real big fish to escape the law, even legally

Anyone with substantial overseas income or assets, that too earned illegally can easily ensure one of his family member is a NRI and keep all wealth in his / her name. It is so easy to purchase such residences in numerous nations, perfectly legally. It will be impossible to go after such individuals. In any case these people are not going to declare assets in any return and if by some miracle the IT can find them and prove the case, they can easily do so without this law as well, under existing Income tax laws.

5. Doesn’t help with vast amounts of black money inside India

That should be clear from the title of the bill itself. But then our minister has a fantastic cure! Another law, presumably of equal length, complexity and viciousness will be enacted for that! I can see many ITOs and CAs licking their palms in anticipation!

6. Doesn’t address the structural issues that help generate black money in the first place

Some of the structural issues have been addressed, although slowly and over a very long period of time. Ridiculously high tax is obviously the first one. We had urine drinking morons running this country that argued 98% tax is ‘reasonable’. Thankfully today they are a lot better.

But there are many other sources of black money – the mining, real estate (land), government contract sectors together will probably account for 90% of the black money generated. If nothing is done to stop this, the money will sure find a way to end up in tax havens abroad. If the government does reduce the generation, it will find that such draconian laws are completely unnecessary.

7. Reflects sad state of Indian politics in general. Draconian laws too easy to pass. Real solutions never found

It is the same with so many other laws, be it anti-dowry, anti-harassment, anti-Dailt atrocity etc. Draconian laws get passed because no one dares to oppose them and risk tarred with a black paint. They then become nuclear weapons in the hands of corrupt cops, officers, lawyers and others who simply use them to generate revenue.

Many lawyers openly confess that their first advise to any woman coming with a divorce case is to file a Section 498A complaint. The cops then merrily go and arrest anyone and everyone they can find, including mothers, grand mothers, uncles, aunts and relatives. This then generates huge revenue for them, lawyers from both sides as well. Little wonder when attempts to dilute the section were made, the biggest howls of protest came from lawyers!  It is almost similar story with the ‘atrocity against Dalits’ Act which shifts burden of proof to the accused! Just last week a judge of the Chennai High Court threatened to use this very act against his own fellow judge, that too the Chief Justice, for difference of opinion over a routine matter of appointments, underscoring the ridiculous extent to which this law has been misused.

While Mr. Hooda and Shashi Tharoor made good speeches, they could not bring themselves to vote against this bill. Just as BJP had trouble voting against the ‘draconian’ land bill they are desperately trying to dilute now.

8. A big blow to the pro business pro middle class image of Modi regime for little electoral benefit

Forty plus years of Nehru/Indira Gandhi style socialism and the ridiculous nonsensical laws, rules, notifications and regulations as well as paperwork spawned by them have spoiled India’s image as well as its investment and social climate for long time to come. It has also kept generations of Indians poor and deprived. Many educated Indians were hoping for big things when they enthusiastically endorsed Narendra Modi and his vision.

In this context, it will be good if Mr. Modi and Arun Jaitley sit together and think carefully about such bills and their impact on their own image as well as India’s.

They may find that it is better to expend their enormous energies elsewhere.

 

 

Salman Verdict brings out quintessential liberal Indian

The verdict

The verdict is out. Even as poor under trials languish in prison for decade or more, serving time far exceeding sentences for crimes they haven’t committed or proved to, Mumbai High Court chose to set aside all other business to hear his bail appeal within minutes. He got bail same day and now barely two days later, the sentence itself has been suspended.

Pic1

 

Now that ‘mission keep Salman out of jail’ accomplished, one can safely predict our justice
“system” will revert to its usual glacial pace, delivering a verdict sometime after Salman turns 95.

Be that as it may, the case has brought out yet another example of the hypocritical attitude of the liberal crowd or at least the Bollywood liberal crowd.

Bollywood Hypocrisy

Bollywood often seen as the major weapon of India’s soft-power, is known for its blatant plagiarism, low quality, hypocrisy, anti-Hindu hatred, pro-jihadi sympathies wrapped up as liberalism and sheer insensitivity. A lot of that was on display over the last few days

Farah Khan, Abhijeet (singer), many others in utter disregard for the heinous nature of Salman’s crime (drunk driving, not helping victim, consistent denials and unwillingness to take responsibility further exacerbating the original crime) and its poor victims, issued bizarre tweets and statements.

Typical Indian liberal elastic morals and ethics

But what was abundantly clear is this: Indian pseudo liberals, living in a cocoon of comfort, extravagance and luxury wants a separate set of law for themselves as well as moral and ethical code, which too they may flout with gay abandon.

They sit on top of moral pedestals lecturing others on what is right and what is not. They would rather judge than be judged, lecture than be lectured to, and use their ‘liberalism’ as a veil behind which anything and everything can be done without any accountability. Question them, you are a ‘fascist’

If the poor exist at all in this super-luxury seven star world, it is to provide ‘background’ for their moral lectures and to act as props for their elaborate image building exercises, gladly accepting crumbs thrown their way.

Pretty much every trick in the liberal book was deployed to ‘rescue’ Salman. Let’s look at a few of them.

Why not go catch others? A typical argument used by criminals. After all there are so many rapes, murders, why not go after them? You go after their rapes and murders they’ll squeal why not go after drug trafficking and if you go after drugs, it’ll be Can’t they attack poverty first!

He’s a nice guy! The most ‘harmless’ of all the ridiculous nonsense that was thrown about. That Salman is a nice guy. He is, of course. But then that nicety did not stop him from being utterly callous about the victim. Or to own up his act and plead guilty! If he had done so, then it can be rightly argued it is a one time mistake, although he has had other run ins with the law as well.

So the ‘nice guy’ was visited at home to be consoled by Bollywood elite, as if he was the victim! It is pertinent to ask if any of these worthies visited the homes of the dead poor. The answer should be obvious.

 

So much money is at stake! This comes a close second to the crazy defense award. Figures like Rs.200 crores were floated about. A twitterati gets it right though

It’s the fault of victims! This was yet another trick tried. So it is more wrong to sleep on the pavement ‘like a dog’ as singer Abhjijeet puts it, than to run them over. Of course, our resident genius Farah Ali compared them to people crossing train tracks!

Blame it on government! This was the height of liberal idiocy. Blame government for an individuals drunken orgy of crime and then pretend that they are the only ones caring for the poor! Guess it’s ok to bulldoze jayBlameItOnModi walkers and blind going without guard dogs?

 

Sentence too harsh! If all else fails, this can be tTooHarshried.

 

 

Idiotic suggestions and ‘cures’ This takes the first prize! Farah Khan wants separate lanes earmarked for poor homeless to sleep on the pavement so that drunk drivers like Salman can run over whatever else lies on other pavements! Guess walking on pavements should be banned too, so that you don’t get run over by a speeding SUV driven by a drunk Bollywood hunk!

 

 

GST in India – Miles to go

One hurdle crossed

This is no time to sleep. GST Bill has cleared the LS hurdle. A remarkable achievement in of itself for a government often accused of ‘bulldozing’ and ‘arrogance’. But the RS hurdle remains. At worse it may get passed in first few weeks of July. Shamefully, Congress walked out instead of supporting their own bill for flimsy reasons. After all, most the amendments to their bill was the product of further consultation and consensus building by Jaitley. Because of their rabid opposition for opposition sake Congress is losing valuable chance to claim credit for this bold reform.

A long to-do list

But this is only the beginning. There are many things that need to be done right and right on time to make sure the growth boost that GST can provide in theory happens in reality. Let’s look at a few of them

The Rate

Yes, Arun Jaitley has clarified 27% is high and will not be the final figure. But what’s it going to be? We don’t know. The unwieldy looking GST Council will set the rate. Hopefully it will be something around 16% not higher as India is already a high tax country. GST is also regressive, i.e., it taxes poor more heavily than the rich. After all poor spend more save less. In the long run a sensible balance between income and consumption tax is the key to national competitiveness. Very hard to achieve in a federal setup though.

How many rates? This is another key question. Purist fanatics may argue for one rate, no exemptions to keep things simple. But then this is impractical for India. We are going to live with multiple rates, and exemptions to a whole lot of goods, some justified by nothing other than political expediency. This makes accounting complex.  And pushes up rates for the taxed items. Here we would argue it can be ‘mission accomplished’ if the rates are kept to as few as possible (say 3 at most) and exemptions at bare minimum.

The Paperwork

This is the most significant of all. After all, a key benefit of GST is supposedly simplified compliance. But this means several things

The monthly return form has to be kept as simple as possible. For example, in Singapore, most businesses simply fill in three or four numbers. Purchases, Input GST, Sales, Output GST, Net owed/due. That’s it! More rates will mean more breakdowns. But despite that it can be kept simple if there is bureaucratic will.

Information should be asked for on exception basis, only if evasion is suspected or arising from random checks. There is absolutely no need to ask for detailed information from each and every business, drowning the babus in mountains of useless data.

The registration process has to be instant, online and the exemption limit for optional registration kept at sensible levels. The paperwork has to be so easy, small businesses should opt to register instead of fearing the process to stay out of GST altogether. This helps them get input tax credit. It also helps the Government – it gets to tax the last bit of value add (retail margin) and gives access to statistics of consumption and business activity otherwise lost.

The process of proving input tax should also involve as little paperwork as possible and kept simple. If refund cannot be claimed, businesses would find ways to stay out of the system and not pay output tax as well. Here again, the returns filed should be taken as true, with stringent penalties for wanton wrong declaration or false claims. This is easier said than done. Our bureaucracy is used to treating every businessman as a criminal in order to setup a complex system that is then used to milk bribes and favors. And provide rent seeking opportunity to unproductive “experts”, accountants, fixers and the like. What makes GST even more challenging is the input may have been taxed in another state. This gives lots of incentives for the state where the output is taxed, to deny input credit or insist on onerous, impractical documentation. This could be due to irrational fears or simply to increase ‘revenue’ opportunities for babus and netas. This is where the Central Government should control the process to ensure transparency.

The Coverage

A lot has been said on numerous items left out of the GST system. What this means is the input tax spent on producing those items gets cascaded, losing the GST value-add benefit. This obviously hits industries using these products as their key input and its final consumers. And there’s lots of them.

It also means fragmented production capacities for items like alcohol. It would be near impossible to setup large scale bottling and canning lines for beer or wine, for instance, to be produced where it makes sense, and shipped to consuming states. Getting states to agree to this, when they get huge percentage of their revenue from alcohol is going to be impossible.

Here again, we would argue for taking pragmatic look at what is sale-able in the current system and not waste time insisting on perfection along Singapore or New Zealand lines. This is where agenda driven columnists that have been slamming the ‘imperfect’ GST get it wrong. Perfection is something we should work on for the medium and long term, savoring minor victories along the way.

Hopefully once states see the tangible benefits of GST system, they will be more amenable to including more items with the assurance that they don’t lose out on revenue.

The Process

One advantage of a fragmented tax system was that states could decide quickly on what gets taxed, how much and when. The GST system introduces a rather complex consensus process which has to be activated for every major change.

We have to see how this works out in practice. It is too early to comment.

Other concerns

We are not as concerned about the 1% cascading tax as others seem to be. It is supposedly temporary, and even if it becomes permanent, if it helps get GST off the ground, it may pay for itself in more ways than one. After all it is better to get started somewhere instead of spending another decade building a perfect GST.

Something is better than nothing!

All said, something is better than nothing. Past experience tells us, be it in aviation policy, telecom liberalisation or for that matter anything else, the “Indian way” is to get going with something imperfect and once it becomes part of landscape, patch it up along the way. It will still be something imperfect by any rational comparison, but if you look back 20 years you’d go “Wow, that’s a lot better!”

GST is no different

 

Revised upgraded version of Rahul Gandhi

It’s a bird! It’s a plane! No its Rahul Gandhi V4.2.1 launched afresh by Congress party after his disappearance for 2 months, presumably to Thailand. For a guy that sarcastically requested PM Modi to ‘visit India’, it is strange he could not find peace and inner awakening from within this subcontinent, something Buddha and many others seem to have managed quite well.

It’s clear Congress did a lot of home work to ensure this revised, upgraded version would get better reception in the marketplace. Courtiers were lined up in the media to give the story a good copy and push things along with flattering tweets and articles.

But then in arranging fawning praise of the crown prince by media “friends” as well dynastic domestic servants and sycophants, Congress inadvertently betrayed its real problem.  It came across as a mother going into raptures over the babble of her child who should actually be speaking full sentences for his age.

For example when Rahul spoke in the Parliament for the first time in this house, after a year of dozing, (And his third speech in entire Parliamentary career of more than a decade), party faithful started dancing as if the messiah has arrived with the manna. Shashi Tharoor’s was a typical reaction “Fiesty, combative, bilingual speech….he and INCIndia are back!“. So a 46 year old man speaking Hindi which is as good as his mother tongue, and English is something to be celebrate! Hallelujah!

Whether the rest of India and ordinary voters will react the same way will be known in a few years time. But for now, Congress has a lot of servants singing “Thumak Chalat Ramachandra” every time Rahul Gandhi takes baby steps!

For now, its comedy time as our dear friend proved he needs a smartphone to ‘copy’ even a simple paragraph in English paying tribute to Nepal earthquake victims. Twitter world was rolling in the aisles trending #PappuCantWriteSaala  Wonder how much of the precious money spent on building up a pro-poor image for the messiah had to be written off with that one picture of Rahul copying from his smartphone! Thankfully Mr. Tharoor did not tweet his delight over Rahul writing a paragraph in English with his own hand.

But many others would not be amused to see yet another Gandhi (after his grandma and Papa/Mama) trying to turn the deprivation and misery created by their own policies and misrule into a franchise or marketing gimmick to exploit to rule yet again, create more misery.