The
Tax Administration Reform Commission (TARC) headed by economist Parthasarathi
Shome has recommended, in its report submitted to the Union Government on
Tuesday that the Government reintroduce the controversial fringe benefit tax
(FBT) and the Banking Cash Transaction Tax (BCTT) that were originally introduced
and later withdrawn by the UPA Government.
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| The Commission headed by Parthasarathi Shome has recommended re-introduction of the Fringe Benefit Tax and the Banking Cash Transaction Tax |
The FBT, which taxes the perquisites provided by
companies to their employees, was introduced as part of the Finance Act, 2005,
as an additional income tax and came into force on 1 April 2005. However, it
was withdrawn from assessment year (AY) 2010-11 after companies complained that
it increased the compliance burden on employers. Shome in his report
says the introduction of FBT was a major step towards widening the tax base and
bolstering direct tax collections. In fiscal year (FY) 2004-05, about Rs.4,000
crore was collected under this head. However, legislators and government
officials were kept out of the purview of FBT. “This violated the principle of horizontal equity since some taxpayers
enjoyed these benefits without attracting levy of tax, while others had to pay
tax,” the report says. “A good tax that had
the potential to reduce tax evasion and collected Rs.6,000 crore annually in
revenue had to be abolished due to lack of horizontal equity and commensurate
pressure from powerful lobbies who paid FBT. Reintroducing FBT, without the
distinction that had been made earlier by keeping specific sections out of its
purview, would be an effective measure to widen the direct tax base. This is a
good temporary administrative measure for enhancing tax collection, until
rising income tax collection makes it unnecessary,” reads the TARC report.
The
banking cash transaction tax (BCTT) was introduced with effect from 1 June
2005, through the Finance Act, 2005, to track unaccounted-for money and trace
its source and destination. BCTT was levied on cash withdrawals of more than
Rs.50,000 a day for an individual or Hindu undivided family (HUF) and Rs.1 lakh
for others from their bank accounts, other than savings accounts. It remained
on the statute book for about four years and was withdrawn with effect from 1
April 2009.
The Commission said BCTT had
enlarged the information system of the income tax department and that there was
no other instrument at present by which such information was being captured.
“With its withdrawal, an important source of information to monitor
transactions of unaccounted money has dried up. The availability of information
that was being collected through BCTT would certainly help the department widen
the information base,” the report added. The commission said BCTT can be
reinstated as an effective administrative measure if not by amending the Income
Tax Act.
The
report recommends that the number of income taxpayers should be doubled from
three crore to six crore in three years. The Commission was not in favour of a tax
amnesty scheme. "Taxpayers keep waiting for
amnesty schemes to be announced and take advantage of these schemes to build
their capital. "Amnesty schemes also cause inequity among taxpayers, and
there is no proof that they improve taxpayer behaviour among evaders. They,
therefore, should not be encouraged through amnesties," said the report of Tax
Administration and Reform Commission (TARC).
The Shome Commission in its
third such report since it was constituted has also pitched for taxing large
farmers with incomes above Rs.50 lakh a year. The report said agricultural income
of non-agriculturists is being increasingly used as a conduit to avoid tax and
for laundering funds, resulting in the loss of crores of rupees in annual tax
revenue. “A solution could be to tax
large farmers. Against a tax-free limit of Rs.5 lakh on agricultural income,
farmers having a high agricultural income threshold, such as Rs.50 lakh, could
be taxed. This will keep small farmers out of the purview of taxation and yet
close one escape route for black money,” the commission said. The
commission said states could pass a resolution under Article 252 of the
Constitution authorizing the centre to impose tax on agricultural income and
all such taxes collected by the centre, net of collection costs, could be
transferred to the states. “For this
purpose, of course, an across-the-board political consensus needs to develop,
and be followed by appropriate amendments, laws and collection procedures to
ensure effective implementation of such an important change. Obviously, the
TARC realizes that this is a fundamental structural reform proposition. Yet,
successive governments have shown a lack of political will to tax agricultural
income because of the politically strong hold that the agricultural lobby has
over governments,” it added.
Talking about other steps to
widen tax net, it said : "There is a
distinct aversion to paying taxes. A conducive environment and tax culture
should be created to encourage them to pay their tax dues voluntarily."
The Commission also recommended that wealth
tax base can be increased by including intangible financial assets in the base
while considerably raising the threshold and decreasing the wealth tax rate.
The Parthasarathi Shome Commission,
appointed by the previous UPA government, in its report to the finance ministry
also said that Central Board of Direct Taxes (CBDT) should comprehensively
identify reasons for the widening gap between PAN card holders and actual
number of taxpayers. The Commission said that there is at present no structured
mechanism for matching PAN with non-PAN data. “More data-based investigation is required to develop such a mechanism
as this would contribute to deepening and widening of the tax base”.
The report says that currently
there is a perceptible gap between the potential and the existing number of
taxpayers. The report said that the focus has to be on bringing in new
taxpayers and targeting sectors that remain under-taxed or untaxed.
The report noted that many
small businesses in the informal economy elude the tax net and remain untaxed. “For these groups, the tax administration
should design, promote, and establish simple, optional presumptive tax schemes,
including those based on turnover or a compounding (turnover) basis, in service
tax below a threshold", said the report.
The commission said TDS coverage
should be expanded to capture more and more transactions, especially those that
involve large amounts of cash but remain outside the tax net. It said
exemptions and deductions based on area and industry should be minimised, if
not done away with.
Noted economist Parthasarathi Shome was given the task of heading the commission to
streamline the country’s tax administration by the previous UPA Government, and it remains to be seen whether the TARC's recommendations would find favour with the present Government.
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