The irony is that although the country has about 250 million out of 997 million people belonging to the middle, upper middle and affluent classes, only about 1 per cent of our total population pays personal income-tax. The crux of the problem is collecting the dues of the Government from those who have the capacity to pay taxes.

A presumptive income tax

The main difficulty is in determining the true income of a tax payer. If the universe of tax payers is to be increasedto at least 75 million, tax administration would virtually break down if its officers are required to examine the books of account, records and other documents to determine the true income of even 2 per cent of the tax-payers. Hence, the tax net can be cast wide only by adopting a method of presumptive income tax.

The concept is to identify some standard items of expenditure, which can be ascertained from official sources. Some of these items are electricity bills (about 75 million consumers), telephone bills (about 20 million), ownership of vehicles registered with RTOs (about 40 million), and property rateable value as assessed by municipal authorities for house tax. This will cover atleast 75 million citizens, considering the fact that in a majority of households there will be more than one income-earner. After collecting information in respect of these items of expenditure, a uniform multiplier of six (eight in the case of business units) can be applied to the householder's total expenditure with a viewto arrive at his deemed income. On such income, progressive tax rates from a minimum of 10 per cent to a maximum of 25 per cent should be applied. During the financial year 1997-98, the Government collected around Rs 20,500 crore from individuals as income-tax. A higher amount could not be reached despite draconian provisions being on the statute book, like powers of search and seizure, and prosecution. Therefore, the Income-tax Act, 1961, consisting of as many as 540 sections, has failed to fetch adequate resources for economic development.

Under the suggested scheme, if an average amount of Rs 1,000 per month is collected from 50 million citizens, the tax accruing to the exchequer would be Rs 60,000 crore. This tax could be collected on presumptive basis without a tax payer having to prove the exact figure of his income or the source thereof. A revenue earning measure which would be virtually painless as far as tax payers are concerned, is to have a final withholding tax on interest which is paid todepositors. Interest payable to depositors by banks, institutions and companies on monies borrowed by them should be taxed at a nominal rate of 10 per cent in the hands of the institution which pays the interest, just as distributed profits are taxed in the hands of companies. In that case interest, like dividends, can be exempted in the hands of investors. This proposal will fetch the exchequer at least Rs 10,000 crore every year.

Ultimately, tax revenues will be buoyant only if there is a steady rate of industrial growth.

Tax reliefs for mergers and amalgamations

If the industrial growth rate is to be raised to at least 9 per cent per annum, it is necessary to revamp the provisions of the income-tax law to enable business units to reorganise. To achieve this objective, the following suggestions are made:

Demergers, reverse mergers and spin-offs

The concept of demergers, reverse mergers and spin-offs are becoming popular in India. There are no specific provisions in the Income-tax Actdealing with such situations. The main object of de-mergers is to revive a sick company and help in increasing productivity. It is suggested that section 47 should contain a specific provision that there will be no capital gains if:
(i) An asset is transferred in a scheme of reverse merger, demerger and spin-off from one company to another provided that the transferee company is an Indian company;

(ii) an issue is made of shares under a scheme of reverse merger, de-merger and spin-off.

Amalgamation

One of the effective measures to revive a sick unit is to amalgamate it with a healthy unit. However, a healthy unit will agree for amalgamation only if it is provided with certain incentives such as relief in respect of the unabsorbed depreciation and unabsorbed losses of the sick unit. Section 72-A contains provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation.

However, the incentives under section 72-A areavailable subject to the recommendations of the specified authority appointed by the Government. There is inordinate delay in getting the clearance under section 72-A. By the time approval is obtained, the sick unit may have become incapable of revival. Further, section 72-A applies to amalgamation of a company owning an industrial undertaking or a ship. An industrial company which may not own an industrial undertaking is not covered by the scope of this section. It is, therefore, suggested that section 72-A be amended appropriately. It may be provided in the section that where the scheme of amalgamation is approved by a financial institution or a scheduled bank as being a scheme for revival of a sick unit, the benefits under section 72-A would be available and the approval of the specified authority will not be required.

c)Benefit of carried forward loss

Section 79 applies to all companies in which the public are not substantially interested. The section provides that if a firm has incurred a loss and ifmore than 51 per cent of the shareholding pattern has changed, the loss cannot be carried forward. It is essential that section 79 is amended for industrial firms so as to allow them the benefit of carried forward loss even where there is a change of 51 per cent in the shareholding, where the takeover of the sick unit is approved by a FI or a scheduled bank.

A National Court for Direct Taxes

At present, the level of tax compliance in India is one of the lowest in the world. The main reason for this is that assessing officers tend to make high-pitched assessments. Further, it takes as long as 30 years for a tax dispute to be finalised. This encourages tax payers to evade taxes and indulge in corrupt practices by offering bribes in order to settle disputes at the level of assessment. It is, therefore, imperative to speed up disposal of appeals filed against an assessment order. The only solution is to set up a National Court for Direct Taxes which would be a judicially independentcourt.

Introduction of VAT

The time is now right for a full-fledged value-added tax system to be introduced which would replace the present Modified Value Added Tax (MODVAT). The finance minister should, therefore, appoint a committee of experts to draw up a plan of action and the parameters to be laid down for achieving the full-fledged value-added tax. The committee should also give a draft of the new law.

To conclude, the finance minister indeed faces a daunting task. He has to ensure that Government expenditure is kept in check but Plan expenditure is increased in order to continue with socially desirable schemes. He has also to ensure adequate funding for agriculture, infrastructure and defence services. At the same time the slow down of the economy has to be reversed so that revenues continue to grow.

The widening of the tax base which would result in more tax payers rather that tax return filers, seems to be the only solution for keeping the fiscal deficit within the limit of 5 per centof GDP. At the end of the day, the finance minister has to inculcate fiscal discipline despite his political compulsions.

(The author is an advocate with the Supreme Court of India)