EcoManifesto: Remove Exemptions, Reduce Tax Rates

6 comments Written on March 10th, 2014 by
Categories: EcoManifesto

In Capital Mind we start a series of posts on the economic future, and what policies must be adopted by whichever party will form the next government. We will tag these posts “EcoManifesto” and eventually have this wonderful long list that we hope will change the future of India’s economy. This is not an unbiased view - we are on the side of free markets and a freer economy which for the sake of not confusing us with religious bigots, I will call the “Not the Left”.

Why?

The nature of politics in India is that all discourse is brought down to levels of name calling, strawman arguments, ad-hominem or simply a class divide. Like:

  • But you support the rich people because you like markets (class divide, ad-hominem, strawman)
  • How dare you question [name famous person]? What have you done in your life? (Ad-hominem, utterly bizarre call to authority)
  • The minister met Ambani, so he must have been bribed. I can’t even find evidence becua
  • Come and join politics for yourself, don’t do armchair stuff (This is silly because all the thinking has to be done in armchairs. You need the thinking in order to have the proper doing.)

In that context, we will be a breath of fresh air to the argumentative process. And I encourage all of you to chime in. (Only the above kinds of needless arguments will be mercilessly moderated.)

Direct Taxes: Remove Exemptions, Reduce Tax Rates.

There are a lot of unnecessary subsidies out there. If your parents need an operation, there’s an obscure section of the tax law that allows you to claim that amount as non taxable. You can buy insurance, certain equity mutual funds, 5 year fixed deposits, pay for your kids education or pay your housing loan principal with a total cap of 100,000 per year.

This is unnecessarily complicated. We should abolish every single such exemption.

  • Corporates should pay 15% tax, flat, on all profits. No exemptions.
  • Individuals should pay zero tax if they have Rs. 500,000 or less in income,
  • Individuals: 10% for between 5 lakh and 10 lakh and,
  • 15% above Rs. 10 lakh.
  • Capital Gains Taxes are 10% of profits made after allowing for inflation adjustments.

This also means there is no special treatment for women or senior citizens or any caste or creed. There is no “Cess” It’s as simple as that.

What We Need To Do

To achieve this, we will need to:

  • Eliminate all SEZs with immediate effect. With lower tax rates no one needs to pay. If you think this is disruptive,remember that MAT was about 20% already, so even the exporting company will see a CUT in tax.
  • Remove MAT and Forget about past MAT credit. Minimum Alternate Tax was a tax that you paid anyhow, regardless of how much income you made. The idea was that you could claim a lot of exemptions but at least 18-20% of your income was supposed to be exposed to tax. There is no need to have MAT anymore, since no exemptions exist. There is however a need to ensure that past MAT cannot be used as credit after MAT is removed, so we need to discard all MAT credit. (Note that this hurts balance sheets of a lot of companies that carry this as an “asset”)
  • Eliminate all housing or investment related exemptions: At a personal level, interest paid on a house has qualified for tax exemptions. If we let this remain, then we should allow it for buying a car as well. Or for education. But this makes no sense whatsoever, and we should simply remove those exemptions entirely. If you pay interest on your house, that interest can be added to your cost, and when you sell the house, you get a lower profit appropriately.
  • Remove the tax freedom on equity shares and mutual funds: There is absolutely no reason to give tax free equity purchases.
  • Treat insurance as an investment if people get money back before they die (or at maturity without a claim). We will have to grandfather past investments only to the extent of money paid earlier, all subsequent premiums (of even existing plans) will not have a tax free exit. (So maturity amounts will be pro-rated by premium paid before and after this law comes into place, and taxes paid on the after). This avoids abuse.
  • Remove tax freedom for Mauritius or other foreign countries. Do not allow anyone, including foreigners, to make money in India without paying the requisite taxes. However reduce the tax rate to 10% on investment income.
  • Agriculture should be taxed. It is not right that farmers making a profit of more than 500,000 per year should pay no taxes. Let’s tax them immediately, but only on income going forward.
  • Remove the concept of HUF. The concept of a taxable entity called a Hindu Undivided Family is retrograde, and possibly has religious issues embedded in the tax code. Eliminate it completely.
  • Rental Income should be treated as a business.
  • If you sell a house to buy another house, you need to pay taxes on the gains if any. This is just like what happens when you sell one car to buy another. This sounds crazy, because we think upgrading our house without paying any income tax on the gains is our birthright; it is not, and we must pay the 10% capital gains tax on the gains on the sale (even if the money was used to pay for another house). This will reduce the speculation on housing upgrades and eliminate a lot of paperwork.

Have only two tax heads: Salary and Business. Simplify Tax Forms

We currently have five heads of income in the tax code: Salary, House property, Business income, Speculation, and Income from race horses or such.

These are unnecessary. We should simply have Salary and Business, and that’s it. There should be a one page tax form for those who have only salary income:

  • What is your name, and PAN/AAdhaar? (Address details are already in Pan card or Aadhaar)
  • How much salary did you earn?
  • How much was already deducted as tax at source?
  • How much is left to be paid? (And tell me how you paid it)

That’s it. In fact this form can be prefilled - the minute you log in to the Income tax department web site, they know the income you’ve made, and the tax you’ve already paid, and all you need to do is “Okay, that’s it”.

People who have Business Income of any sort get a more complex form, but even that is easy to fill because there are no exemptions. Businesses need audited balance sheets above Rs. 1 crore in income, but below that can be unaudited income statements (Gross Revenue, Expenditure, Depreciation, Interest)

All direct subsidies paid to individuals or businesses will have their PAN/Aadhaar, so they will automatically be added to income, whether you like it or not.

Subsidize Business Investments Through Depreciation

Investing in certain businesses will need to be encouraged. But we should not provide tax exemptions. Instead, since all business (including farming) requires investment, we should accelerate the depreciation on those investments. So a tractor on a farm should get 100% depreciation, just like you have for seeds or for labour costs.

Housing in rural areas for renting can be given higher depreciation in order to offset rental income.

All depreciation of this sort should have an automatic end date of 3 years. Extension is only one year at a time. As a policy we should have no open ended schemes at all.

Businesses Will Always Have An Advantage

If you are salaried, you pay very high taxes as a percentage of your income. Because the businessman can claim the petrol he spends on to travel to work as his expenses, but you cannot. Or some of his rent, his travel, his driver, his purchases and so on. But the salaried employee does not.

The offset is the Rs. 500,000 exemption he gets without paying taxes. That’s Rs. 40,000 a month that a business has to pay tax on, but individuals with a salary do not.

However, businesses (remember even farming is a business now) will always retain a tax advantage, and that’s not bad at all. This should eventually encourage small business and startups.

Reduce Income Tax Staffing

We spend a lot of money just recovering taxes. Reduce the tax collection staff to a lower number, using technology. Increase the amount you pay tax officials, but reduce their headcount. Increase the headcount of those that handle appeals.

Keep income tax officials fully accountable, with a chain of command that allows only transparent tax decisions. (I.e. no “closed door” settlements with tax lawyers and the government).

We should also keep increasing clarity where required and operate on a “principles” basis at other times. For instance, it’s difficult to note all types of income tax fraud, so certain expenses may be removed by tax officers; however, you can appeal faster as there are more appeals officers.

No retrospective taxes.

That’s self explanatory. Don’t tax us for something in the past even if it is only a clarification. (Unless that clarity benefits the taxpayer)

Comments? Additions? Please comment here, or tweet to @deepakshenoy.

Much more to come.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

6 comments “EcoManifesto: Remove Exemptions, Reduce Tax Rates”

What about other exemptions under 80C? Equity investments with 3 yr lockin, EPF, PPF? Should / or Shouldn’t they go too?
What about returns from these? EPF/PPF/Gratuity? Should these be tax free in the hands of the recipient?
Should an idle flat/house/land have a “Deemed Rent” and corresponding income tax? Or only on actuals? Should there be any limit on how much land/how many houses an individual owns? What about a company? (ULCA)
No discussion on taxation would be complete, in my opinion, without discussing government expenditures. Hence, some questions thereon:
Should salaries of government employees have a fixed + variable component, variable decided by amount of tax collected/actual money in the coffers vs deficit financing?
Should govt. expenditure be limited overall to collected revenue in a year/bi-annualy?
Instead of deficit financing, can govt. make a profit and return excess money to RBI to be extinguished? (Strong Rupee)

When I buy something in the nearby mall, I get taxed 20%. 20 friggin percent. Why is it so high? Does the DTC do away with high VATs, service tax, etc? I don’t even know what happens to the 10% service tax. What is it allocated towards? And, why do we have a separate education cess, when normal tax can also go for funding education. I mean, why is there an education cess on transactions, rather than allocating education funds out of income tax revenue? What is the connection between a transaction and education funding? If we transact more, we should fund education more, that doesn’t make sense, does it?

Apparently, transaction taxes are a bad idea:
http://indianexpress.com/article/opinion/columns/not-by-babanomics/

which brings me to my pet peeve – the STT. PC had said that it was going to be temporary when he came up with the bright idea. Well, we all know now how temporary it was. And, yet we believe him now when he says some other capital control will be temporary. We shalt never, ever learn….

Love it when u go all UTOPIAN !
… my reaction … and the cow will jump over the moon !

nice post though but i wd like tds limits to go up higher and the 5 lakh pegged to food inflation or retail cpi inflation figure arrived using independent data not riggable by govt!

Heh. Yes, we could peg it to inflation but I think we shouldn’t- we should simply have a new budgeted round figure every year. Otherwise we will get something like “Upto Rs. 5,43,228 is non taxable” which is certainly not desirable!

What is this law about claiming your parents operations as non taxable? Would like to know more about that please.

I think exempting those below 5 lakhs makes no sense. I do not have the numbers but I’m sure it takes out a lot of Indians from the tax paying bracket. A uniform 10%, even 8% from one to ten lakhs would earn a lot more.

VJ – it’s one obscure part of the IT law someplace.

Exempting those below five lakhs = they form around 90% of all tax payers but only 10% of total taxes collected. They collectively paid just Rs. 15,000 cr. in taxes. This is small change for the government for at least five more years, if they focusses on revenue through non tax sources (i’ll come to that separately) We will gain by having lower income people spend more of their money or invest it, instead of worrying about taxes.

check this: http://capitalmind.in/2012/04/only-406k-taxpayers-earn-over-20-lakhs-dtc-report/