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
- 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.
- Get rid of MAT. Makes absolute no sense at all.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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.
- 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.
- 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!