BEHIND the ogre of corruption that has loomed over the pre-election scenario, lies the country's cumbersome, long-winded tax processes. So claim many theorists. Says Shailesh Haribhakti, director of Haribhakti & Co, a Bombay-based tax and management consultancy firm: "The tax system is a mess, riddled with exemptions, deductions, and credits that serve little purpose, apart from being expensive for individuals and corporations to comply with. As a result, ways and means to avoid taxes by hook or by crook are devised everyday, and this results in the unaccounted—black—money into the system."
Not that India is an exception. Tax reform is already one of the main issues in the US presidential race. Said a recent issue of the US-based Fortune International: "Well, the flat tax has now burned into the national consciousness, thanks in part to the single-minded candidacy of Republican hopeful Steve Forbes. More interest was focussed in the flat tax in January when a national tax-reform commission headed by Jack Kemp endorsed the concept. All of a sudden, you can't turn on your TV or walk through an airport without the words FLAT TAX jumping out at you. At the least, tax reform is emerging as a major issue for the presidential election—perhaps the major issue."
That tax reform has been debated in India for several decades is evident by the number of Government-appointed committees in post-Independence India that looked into the issue. But very few of the recommendations of the committees have actually been implemented. Says Haribhakti: "It's never too late. The changing global environment has made several countries sit up and review their taxation policies. With the new government scheduled to take charge in a few months, a one-time flat tax reform modified and adapted to India's vagaries may just atone for its past omissions and commissions." Terming tax reforms to be of paramount importance, the Economic Survey released in Parliament on February 27 states: "We must work to quickly turn the cur rent primary deficit into a surplus through higher revenue buoyancy from tax reforms, larger non-tax revenues from a determined application of commercial principles in public enterprises and a tight curb on low-priority expenditures."
Platitudes apart, it is the attitude towards the taxation policy that may need to be changed. At a meeting organised by the Federation of Indian Export Organisations (FIEO) last month, Revenue Secretary M.R. Sivaraman stated: "The Government will replace the Income-Tax Act, the Customs Act and the Excise Act in stages. There are countries that have transformed their laws in one step, but we do not want to follow suit as it may end up creating more legislation than required. Basically, we want a simple system with only two or three rates."
That sounds promising. But several Indian industrialists have already been following Steve Forbes' proposals with more than passing interest. Says Mukesh Gupta, vice-chairman of the Lloyds group: "If the new government decides to tackle the taxation reforms seriously, it should start thinking about the flat tax structure. It could give a three-year notice period to introduce the concept of a flat tax, during which time the entire country would have geared to this concept." He adds that if the new government fixes a 20 per cent flat tax for the country, not only will it earn substantially more revenues than today, investments would flow in at a rapid pace.
However, other proponents of tax reforms suggest a two or three-tiered flat tax structure for the country. Says Haribhakti: "What the country needs is a complete rationalisation and truncation of our tax code to reduce it to a 30-page document. We can have three different rates for direct taxation with no deductions, no exemptions and no complexities. Hong Kong has survived with a 15 per cent flat direct tax and they are budget surplus."
Several tax experts and corporate chieftains Outlook spoke to recommended a direct tax structure as follows: a flat corporate tax of 35 per cent for companies with profits of more than a crore of rupees. For companies with less profits, a tax of 15 per cent. A flat 10-per cent tax for small business enterprises and salaries upwards of Rs 1 lakh, and 5 per cent for farmers and those businesses below a lakh. "There is no doubt that the Government will earn at least 20 per cent more revenue if the taxation system is streamlined on these lines," says Gupta.
That the tax net has to be widened becomes imperative considering the fact that customs duty which is the maximum revenue earner for the Government is also being gradually reduced, thanks to the country opening up to the global economy. Says Dr Kamal Sen, adviser (planningand research), Exim Bank of India: "With customs duty coming down, the Government should start thinking of taxing farmers. There are a lot of rich farmers in the country. If it is a sensitive issue politically, at least VAT (value-added tax) should be introduced on food products. The Centre will earn more through VAT." Adds Haribhakti: "Extending MODVAT (Modified VAT) to capital goods and to the textile industry is extremely healthy. Everyone including the service industry should be subjected to VAT. In fact, we need VAT to become international, like they have introduced in the European Community."
However, in the past five years, tax reforms in whatever measure have helped the Government increase its revenue. The direct tax collections increased from Rs 11,024 crore in 1990-91 to Rs 25,515 crore in 1994-95. Tax experts estimate Government revenue from direct taxation to exceed Rs 60,000 crore by the turn of the century if the norms are made simplistic in a more or less flat structure.
The strongest case for the tax reforms is Adam Smith's four maxims with regard to taxes in general: certainty, convenience of payment, economy in collection and equality. That the flat kind of tax structure—albeit with certain modifications unique to this country—serves three of Smith's maxims, is good enough reason. Says Haribhakti: "The simplified tax structure would vastly ease the job of filing taxes, especially for individuals. Anyone who has filed a long-form tax return with itemised deductions should know how cumbersome and time-consuming it is." Besides, it would also save the Government exchequer a lot of money in salaries to the income-tax employees all over the country who can be retrained and redeployed. So, is anyone listening?
