We often hear the elegy that in a country of 135 crore, a mere 1.5 crore people pay income tax, despite three times that number filing returns. The answer is not far to seek however. From the beginning, we have exempted agricultural income from income tax on the specious grounds that agriculture is a subject of the state. This removes about 60% of the population from the income tax burden at a stroke, although in fairness it must be admitted that many of them may not have taxable income. But what about those with taxable income?
Why spare them if not make them pay tax on their off-farm income at the rates justified by their combined income, ie off-farm income plus their farm income. Aren’t we taxing doctors when health is a state subject? It is common knowledge that the elitist and urban phenomenon of farms on the outskirts of large cities has the gravity of this cynical exemption. Ultimately, farmhouses mean luxurious living in sprawling havelis with a dash of fantasy farming – the farmhouse is too exempt from income tax. Fictitious agricultural income is an excellent foil for laundering black money.
Similarly, we have granted a general exemption to charitable and religious trusts. So much so that most educational institutions and hospitals are run by trusts. There is no charity practiced by them with the highest court in the land saying that charity need not underpin their existence to qualify for the exemption. They charge huge tuition fees and mind-numbing hospitalization bills and make handsome profits, yet thumb their noses at the taxman.
And again, we pamper the equity market with a flexible and uniform tax of 15% and 10% on short-term capital gains and long-term capital gains, respectively, the first Rs one lakh of long-term capital gains being exempt in any case. Why heavily tax an employee and pamper the stock market? Given the large volume of trading seen in the market, securities transaction tax (STT) adds to tax revenue, but that does not mean that capital gains must be made. Deep-pocketed foreign institutional investors rejoice in such a licentious regime.
This then is the crux of the problem. Moreover, even today, women do not earn money, except in urban areas to a small or great extent, and the children we have in large numbers do not earn either. Elderly people whose tribe grows through longevity also do not pay income tax because they have exceeded their income days.
Yet there is a crying need to broaden the tax base. The presumptive tax scheme on traders has not taken off much as the deemed soft income of 8% of turnover presupposes a large turnover of Rs 31.25 lakh to give rise to an income of Rs 2.50 lakh, the threshold tax exemption. What we need to do is cut the Gordian knot by what Colombia did a long time ago: tax based on visible indicators of wealth. An owner of a fancy car is presumed to earn, say, Rs 10 lakh per year. If he additionally owns a luxury house, he is deemed to have earned Rs 20 lakh and so on. Of course, such presumptions should be rebuttable. The idea is not to impose an unreasonable tax on them but to smoke them out. The current regime of fuming them through the Annual Information Return (AIR) filed by banks, mutual funds and sub-registrars is not yielding much results.
It’s human to flaunt. You can hide your income, but you simply cannot hide your home and means of transport. If he lives in a posh neighborhood with all the trappings of wealth, he should be presumed to have enough income to support his lavish lifestyle. Such an assumption can in no way be called unrealistic or exaggerated. In such a milieu, the taxman would stop being obsessed with the working class, the sitting ducks, and turn their attention more productively to repeat offenders.
— S. Murlidharan is a CA by training and writes on economic issues, tax and trade laws. The opinions expressed in the article are his own.
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