Good job on direct taxes, but mess in customs

Years ago, a top bureaucrat nominated to the Rajya Sabha quipped, “I want to see a day when the finance minister gets up and says I don’t have any new tax proposals.” Finance Minister Nirmala Sitharaman has come close to fulfilling such a wish. The budget has clarified new direct tax proposals, except to clarify the tax treatment of digital assets.

There has been no tinkering with income exemptions and deductions that clutter the tax system. There was much speculation that the government would increase the standard deduction for salaried employees and double the tax-free savings limit. Remember, concessions can be reserved for the next budget, the year before the general election. Nevertheless, a stable tax regime provides comfort to investors and taxpayers.

Proposals to reduce litigation — such as a one-time window to fix defaults — make sense. This is not an apology plan. Taxpayers can file an updated return within two years from the end of the relevant assessment year by paying an additional amount. But India’s taxpayer base is very small, few thousands have declared income 1 crore. It should be widened. The best approach is to deploy Big Data Analytics and diligently follow the audit trails created by the Goods and Services Tax. This will bring many unorganized traders under the purview of income tax.

Good news for taxpayers There is no retrospective change in the Income Tax Act. The Finance Bill states that health and education cess on income and profits will not be allowed as a business expenditure from 2005. It simply means that change is not possible.

Separately, the clarity given on the tax treatment on transactions of virtual digital assets such as bitcoin and ethereum is welcome. Income from the transfer of any virtual digital asset will be taxed at a maximum marginal rate of 30%, but losses from the sale of digital assets cannot be offset by other income. This is similar to the tax rate on lottery winnings.

India Inc should be given relief. no additional taxes; Rather, more relief for companies that pay a lower 15% corporate tax rate due to the pandemic. Also, it is a good idea to propose to keep the surcharge on long-term capital gains from transfer of any type of asset (and not just on listed equities and units) at 15%. This will make it easier to exit from start-up.

The government wants to fight tax evasion, it is legitimate. Therefore, any loss will not be allowed to be set off against the undisclosed income found during the search and survey operations. But the search-and-survey itself is a blunt and antiquated tool in law enforcement. Nabbing thieves sought intelligence and creative use of information technology rather than search and seizure.

Overall, the government has not deviated from the path of direct tax reform. But it has missed an opportunity to make the tax system simple and clear, which is enshrined in the original Direct Taxes Code.

Changes in indirect taxes go against the grain of reform. Customs duty has been increased on many products ranging from umbrellas to smart meters. The government claims that multiple duty exemptions over three decades for capital goods in assorted sectors such as power, fertilisers, textiles, leather, footwear, food processing and fertilisers, have affected the growth of the domestic capital goods sector. Exactly the same for project import duty concessions. The plan is to gradually increase the fee to 7.5%.

But then, some relaxation has been given on inputs like special castings to encourage domestic manufacturing of capital goods. Doesn’t exemptions mess up the tax system? Will it be checked to ensure that there is no hypothetical value addition (as was the case in earlier mobile handsets). A more rational approach is to impose a uniform duty across the board so that one line of production is not privileged over another.

The budget numbers show a 10% increase in gross tax revenue in 2022-23 as compared to the revised estimates for 2020-21. Direct tax receipts are projected to grow by 13.6 percent and indirect taxes by 5.6 percent. The government says the move to reduce excise duty on products has led to a reduction in indirect tax collections. The tax-to-GDP ratio for the coming financial year is estimated at 10.7 per cent. It should be double. Bringing petro products under the purview of Goods and Services Tax can lead to a significant increase in revenue.

Near GST Council.