If one were to analyse our efforts of the first forty years of our independence. while the goals were laudable, we created entities which prospered by manipulation and not by genuine value addition . All our cerebral talent was dissipated in designing complex rules and getting around them. As a result, we have the most complex rules and systems where the non- value adders in the chain of economic activity such as the politician. the lawyer, the bureaucrat and the judge are the decision makers whereas the technologist, the manufacturer and the marketeer who are the genuine value adders are held accountable without having the authority. Globalization, visual communication and other changes sweeping the world , and the success of our scientists, technologists, and managers in countries such as the United States have resulted in a change in the mood of the country and there is growing acceptance that those who have the responsibility must have the authority. There is an awareness that making it simple would immensely benefit the public at large.
If we were to look at our financial policy against this back drop, we are gradually learning to loosen up and make it easier for people to pay taxes and be honest. Moderate taxes and intelligent application of incentives have resulted in impressive growth with prudent fiscal management, However there are two clear features which have to be significantly reduced if not outright eliminated. These are arbitrage and interpretation. Let me explain- if we were to remove opportunities of arbitrage in the taxation system and do not leave room for interpretation,the scope to abuse the system by the tax payer and the tax collector could be drastically reduced. This could also reduce litigation , release the judiciary of some of its burden. This could also release some of our best brains of lawyers, charterd accountants to do something more creative.
I have outlined some critical steps which, if implemented in toto, would go a long way in simplifying procedures, increase collection and achieve considerable equity.These are:
- Each and every citizen should be provided with a biometric identity card with eye and fingerprint identification.This system should be institutionalised and every child should be provided with such identity by the time he/she is twelve years old. Onus should be on the parent/guardian to ensure this is achieved. This card should form the basis for all critical documents such as voter identity card, passport, ration card and driving licence.
- All bank accounts- individual, joint, and corporate of all categories should be cross identified with biometric identity. Six months time should be given to all account holders to comply with cross identification. A further six months should be given to the account holder of an unidentified account during which period the account would be frozen. Unidentified accounts at the end of the second six month period should be confiscated.
- All transactions in excess of say 50 000 rupees should have to be processed through the banking system with biometric identification of the payer and the receiver.
- A policy on currency along the following lines should be made the law and publicly announced.The design of currency notes of larger denomination- 1000, 500, 100 and perhaps even 50, would be changed once in 5 years. At the end of the 5 years the older design would be worthless unless they were lodged into the concerned bank account. The process of change should be widely publicised for a year prior to the actual date of change to enable people to exchange through the bank accounts. If such deposits into the bank accounts are made before the expiry of 5 years and are found to be the unaccounted category, the concerned account should be credited with an amount equal to the sum deposited less twice the amount of tax payable at the highest marginal rate of tax. If a 5 year frequency is considered unsuitable a seven year frequency could be used.
- There should be no difference in rates of taxation applicable to individuals, partnerships, private limited, public limited companies and sole proprietary concerns. Ideally there should be no difference between income tax rates of depreciation and accounting rates of depreciation.
- Taxation rates should have only three categories - no tax upto 400 000, 10 % between 400 001 and 1 000 000 and 20 % beyond. All incomes should be brought under the tax net including agricultural incomes. Exemption to the extent of actual rent paid should be given to each assessee for one house. Exemption should be given for transport at actuals subject to a reasonable ceiling. Loans for housing and the interest thereon should be treated as at present. All savings such as contributions to Pension and Life insurance should be deductible from taxable income subject to a ceiling. Contribution to health insurance should be completely deductible from taxable income. There should be no age limit for health insurance and no restriction on who can contribute on whose behalf. Ceiling on contribution should be liberal. Money spent on education of children should be tax deductible subject to a ceiling. Contributions to Government Bonds floated for for augmenting resources for infrastructure growth- water, transportation, energy , health care and education should be deductible from taxable income and the interest on such income should be deductible from tax. Appropriate ceilings should be specified in each case.
- Registration charges on transfer of ownership of immovable properties should be uniform across the country and not exceed 5 % of the market value. as determined by the government. Permanent powers of attorney used for transfer of ownership of immovable property should be taxed on the same basis.Each transaction should be completed with biometric cards of the buyer and seller. Registration costs should be remitted into Government Accounts with banks designated for the purpose without the use of stamp papers
- All bullion, gold and precious metal jewellery should be provided with one time certificate of possession without question and linked to biometric identity. Subsequent transactions should be through the card linked process.
- An asset register of all movable and immovable assets in excess of 500 000 rupees should be developed over a five year frame and aligned to biometric cards. Even properties not for sale would have to be registered in this fashion without any cost of registration. Unregistered property should run the real risk of confiscation.
- All goods and services should be classified into three categories using the international harmonization code as the basis. The categories should be
1. Bare essentials eg water, rice, electricity, basic health care
2. Needs eg coffee, tea, telecommunication and
3. Others eg motor car, television set
These categories - definitions and inclusions should be approved by parliament. While downward movement could be by Government decision, upward movement such as from bare essentials to needs would need parliamentary approval. - There should be no tax of any sort on bare essentials. There should be no restriction on their production, transportation or movement. Needs should be taxed at 10 % and others at 20 %. VAT for all goods and services should be introduced.
- Data should be collected on possible revenue loss to the state governments because of these measures ans the centre should compensate the states fully in this regard.
- Food, fuel and fertilizer subsides and price and movement control should be removed. Food, fertilizer and fuel stamps should be issued to actual users based on biometric identity cards.These should be exchangeable for material anywhere.
- There should be an automatic price adjustment mechanism for infrastructure services such as electricity and water where Independent Regulatory bodies should continuously monitor to ensure usurious pricing and supply constraints are not engineered and genuine escalations in costs are recovered through price adjustments consistent with internationally accepted norms.
The purpose of this piece is to initiate public debate and refine and improve upon this list so that an equitable and transparent system is developed which recognises and respects honesty and does not give scope for manipulation.