Why is calculating Income Tax considered such a pain? Is there a better way to collect tax than the present system of filing returns? Can the system be made more efficient and effective, plugging leakages and ensuring a seamless collection process?
The hardest thing to understand in this world is Income Tax.~ Albert Einstein
Payment of personal income tax should be a simple affair. However, that is not the case in India. There are a host of income tax slabs complicated with types of income and a plethora of exemptions. This was further complicated by the response of the government to the COVID-19 pandemic, which has had a huge economic cost. The government in its intent to provide a fiscal stimulus has provided in Budget 2020, an optional regime for taxpayers. Thus, taxpayers can opt for the existing tax regime or the optional one, depending on which is more beneficial. A snapshot of only personal income tax slabs is provided in this Economic Times article. The calculation of income and tax rates for different types of income, like housing and the stock market is another story. To add to the misery for filing of returns, one has to know a plethora of exemptions.
Is there not a better alternative? Why should individuals calculate their income in this day and age of technological advancement? I propose a different model of collecting tax – one based on credits in bank accounts. This can streamline the process to an extent that filing by individuals can also be done away with. For the conservative, a declaration can be filed by the individual that the calculation is correct, which will also make it on a sound footing legally. Further, the proposed mechanism can also mean less dodging of tax and a more stable source of income for the government. The direct tax revenues can witness a very high jump by this model.
Let us get down to the basics. What are we trying to capture in Income Tax Returns (ITR)? The answer is simple – income. But the information on income is already lying in bank accounts. Cash transactions are anyways not declared by individuals as income, other than people with very high integrity. So, we should ensure that each credit in a bank account has a ‘tag’, which is easily possible in today’s technology-based banking system. Hence, any credit can have one of the following tags:
- Asset sales
Income: Any credit, which is not a gift, a loan, or an asset sale, can be categorised as income. Further, I would argue these should be no category of exempt income so as to prevent misuse. There may be a facility for registering Permanent Account Number (PAN) of professionals like doctors, lawyers, etc. These PAN can be entitled to 50 percent deduction on income other than the stock market, property, interest income, etc. Stock market income, short term, long term, or derivatives will be reported by stockbrokers in 26AS. Similar treatment can be given for profit from property sales, which are to be reported by registration offices of the government in 26AS.
Gift: Gift from specified relative is exempt from tax as per Section 56(2) of the Income Tax Act. To enable this, banks have to register the bank accounts of such relatives. After registration any credit to such accounts by a relative can be tagged as “gift” and will not attract any tax.
Loan: Any person can give anybody a loan. However, the aggregate of all net loans will be limited to 300 percent of Gross Total Income as per the last Income Tax Return. Any amount above that will be “deemed income” and attract tax. A person may receive a credit as “loan repayment” as well. This may also be tagged as “loan” since there would have been a debit earlier which would have reduced the “net loans” amount. The aggregate of all net loans will be cumulative and carried forward to next year.
Asset Sales: The last category will be asset sales. Stock Brokers giving credit can be classified as asset sales irrespective of the type of credit as income will be updated separately in 26AS. Further, property registration offices will also update the property sale value in 26AS. This will enable tax-exempt mapping for large credits arising from asset sales. Sales/ maturity of financial investments like fixed deposits can also be tagged as “asset sales”. Other asset sales like gold, old furniture, etc. can be classified as asset sales but can be limited to 10 percent of Gross Total Income of the latest ITR. Full-time agriculturists may have their bank account mapped as “agriculture accounts” which will treat all income from selling of agricultural produce as asset sales and exempt from tax. Going forward, the government can set a limit for asset sales from agriculture like INR 10 million, which will net high net-worth individuals in the tax net. In such a scenario, 50 percent sale value may be exempted as given to professionals to account for expenditure.
Further, to make the process effective, it is imperative that transactions are largely routed electronically and can be monitored. Hence, two additional measures will be required.
- All accounts will mandatorily require PAN. The exceptions can be “agriculture accounts” or when total transaction credits in a year do not exceed INR 2.5 lakhs with a maximum transaction value of INR 50,000.
- Cash transactions to be permitted for a maximum of INR 25,000 per month.
Incentives for savings like 5-year fixed deposits can also be incorporated with specified debit tags giving immediate “credits” from the government. The taxation system can be real-time in such a scenario. Whenever income crosses prescribed thresholds immediate debits (10 percent, 20 percent, etc.) can be undertaken and credits passed to the government. This system is complex in scale but simple in concept. Of course, additional complexities of various types of income will have to be incorporated, but nothing that cannot be overcome. This requires bringing together a lot of systems and I assume if planned properly can be implemented within 2-3 years from the concept stage. A revenue jump of even 100 percent for the government is not outlandish as various loopholes will get closed.
This is just a simple structure, which can be modified as per need. Ultimately, personal income tax may not be collected as it is done today and can be completely envisioned afresh.