BUDGET 2015 – BIG REFORM!?!?
Following is an extract of some of the proposals I have suggested to the NaMo Government to be incorporated in Budget 2015 as part of the BIG REFORM:
1. PRESUMPTIVE TAXATION – Akin to GST in the indirect tax arena, even in direct taxes, I feel the tax payers would be happier to see simplicity and clarity. This would not only increase compliance and collections, it would also reduce wasteful litigations. Presumptive taxation, where income tax is levied on a simplified basis is a good option for your Government to explore. Some examples where this could be applied are as below:
1.1 E-COMMERCE – The rise of E-commerce cannot be denied. Players such as Flipkart, Snapdeal, Amazon and E-bay are here to stay. Even companies in the brick and mortar retail space are entering online sales platform. These companies, are enjoying multi billion dollar valuations and are ramping up revenues like there is no tomorrow. However most, if not all of these companies are having huge losses in their P&L owing to huge marketing spends and discounts. These companies are not concerned about showing a profit as their valuations are pegged on their top line only. In this light I feel it would be logical and fair for your government to bring all e-commerce companies in the ambit of presumptive taxation and levy a nominal tax of 3%-5% (say) on their top line and exempt them from being liable to any income tax or MAT over and above the aforesaid. This would shore up tax collections from these companies and at the same time bring clarity and certainty to all engaged in this sector as to how much they are liable to pay as tax. It would also alleviate the need for the tax authorities to audit their P&L accounts year after year to ascertain the correct taxable profits, if any.
1.2 REAL ESTATE – Real estate sector is marred with opaqueness owing to cash dealings and fudging of accounts. Real estate developers sell their inventories and pocket amounts in cash thereby evading taxes. This is made worse by the booking of construction costs which are also opaque and not auditable by tax authorities with certainty. Given that the increasing trend in real estate is towards large complex developments by developers, your government can introduce presumptive taxation on real estate developers wherein the income tax payable by them is linked to the square feet area sold on a quantitative basis. This would not only make it simple to calculate and collect tax from these developers, it would also make the exchequer revenue neutral to the cash dealings by such developers as the square feet sold by them would be a verifiable physical fact and would not be prone to understatement.
1.3 ALCOHOL & TOBACCO – The favourite scape goat for excise collections, there is little sympathy when these goods are taxed on prohibitive levels. However income tax liability is avoided by many in the unorganized sector in alcohol and tobacco business as they are able to suppress profits by inflated marketing spends or booking bogus expenses or under-reporting revenue figures. These businesses should also be taxed on presumptive basis by levying income tax equivalent to some amount per pouch of Gutka/per stick of cigarette/per litre of alcohol sold.
2. CAPITAL ACCOUNT CONVERTIBILITY – After GST, capital account convertibility is the next big ticket reform. While current account convertibility was ushered in 1999 by FEMA, there has been no progress on the capital account other than the liberalisation on piece meal basis. With the balance of payments under control owing to softer commodity prices, and investor confidence in India being boosted, there will be no better time than now to move to capital account convertibility and allow free flow of foreign exchange both into and out of the country. Capital Account Convertibility for India would mean all capital account transactions being allowed as a general rule with a small negative list of transactions which would require FIPB/RBI approval. Possibly a road map can be announced to transition to capital account convertibility over a 2-3 year period in phases. Some initial areas which can be liberated from exchange controls in this budget can be:
2.1 STOCK MARKET INVESTMENTS – Foreign investors are presently allowed to invest in Indian markets through FII route. Also individual investors are allowed to invest through portfolio investment route. It is common knowledge that P-notes are in vogue and many investors invest through this route either to disguise their identities or because they do not fulfil the onerous conditions attached to FII or Portfolio routes. Most countries, even smaller ones such as Singapore and Sri Lanka allow any and all investors to participate in their markets directly by simply opening a broking and custodian account with any local bank branch. Even in India we should open up our markets to all investors to invest directly. Our markets are mature enough now to withstand influx and exodus of funds and there is no reason left to restrict market participation to FII’s or large investors. Moreover the time is right to open the flood gates of foreign funds waiting on the sidelines to enter Indian markets and participate in India’s success story under your able stewardship. This would not only shore up market liquidity, it would also boost tax collection such as security transaction tax, and also aid the weakening rupee.
2.2 REAL ESTATE – There is no reason why foreigners shouldn’t be allowed to invest in real estate in India. Most countries, even smaller ones such as Dubai and Singapore have made a successful business model of attracting foreign investors to directly buy real estate units in their countries and benefited by higher tax collections owing to capital gains tax and stamp duties. In case of India also this sector should be opened up to direct investment, and protection, if at all, be restricted to agricultural land or purchase of land per se.
3. BLACK MONEY – It is one of the stated objectives of your government to bring black money into the ambit of the Indian taxation system. While lot has been said and done about the large sums of black money allegedly stashed abroad, the fact remains the results have not shown any substantial collections to date. Moreover, recently the SIT appointed by the Hon’ble Supreme Court of India has observed that much greater amount of black money in fact sits within the territories of India. I believe there are some steps that can be taken to effectively bring in more and more of the monies into the ambit of the declared economy. Bringing these funds within the ambit would not only shore up the tax revenues but also possibly multiply the GDP figure of India by reflecting the correct numbers including those of the parallel economy. The approach recommended in this regard is a three pronged approach involving following steps to be taken contemporaneously:
3.1 AMNESTY SCHEME – It may be politically sensitive, but the fact remains that the most effective tool for bringing more and more of the black money into the system is an amnesty scheme. Your Government may consider announcing a limited time period amnesty scheme whereby all funds used to purchase a 1 year non-transferable Government Bond specifically issued under the amnesty scheme in a limited window of 3 months (say) shall be exempt from questioning or prosecution and shall be taxed uniformly at the rate of 40% (say) without levy of penalty or interest. The Government bond can carry a concessional coupon rate of interest say 100 bps lower than SBI FD rate for this tenure. I am sure that this would open a flood gate of funds coming into the system and benefit the country in multitude of ways including – greater liquidity, meeting of tax collection targets, repetitive taxation on these funds earning interest, use by the Government of these funds for developmental purposes, and funding of budgetary deficits. A greater good would result for the country and the public by this route than the narrow goal of bringing evaders to book.
3.2 CURRENCY DENOMINATION – Hand in hand with the above amnesty scheme, your Government could announce the phase out of Rs. 1000 and Rs. 500 notes over a period of 1 year (say), restricting the maximum denomination to Rs. 100 (akin to US economy which avoids large denomination notes). This phase out would not only propel people with stashes of black money to deposit the funds into the amnesty scheme, it would also ensure that future transactions including those of real estate are conducted without any major cash element. This would in turn have a cascading effect on tax collections with greater collection for stamp duty and capital gains tax. We would in effect be transformed into a plastic (credit card) driven economy with a GDP that would be a multiple of current levels.
3.3 PAN NUMBER – The proliferation of the PAN number would be the third prong to curtail the black money in the economy. Making the quoting of PAN number across a wider range of transactions, linking up the PAN to Aadhaar Card, making PAN the uniform reference number across tax departments such as GST, Excise, Customs, and allotting PAN to all Jan Dhan Yojana account holders would go a long way in widening the tax base.
© Anshuman Khanna
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