Budget 2022: Presumptive tax schemes don’t work unless interlocked for compliance

S Murlidharan | Updated on: Thursday, January 20, 2022, 09:50 AM IST

The truth is the absence of such a foolproof regime for other classes of income is what is emboldening them to look askance at the taxman.   / Representational image |
The truth is the absence of such a foolproof regime for other classes of income is what is emboldening them to look askance at the taxman. / Representational image |

Economists, who normally don’t see eye to eye with each other, aver that the pincer of presumptive taxation and TDS (tax deducted at source) is the most effective tool to reach out to the hard-to-tax segments.

We have three major schemes. First one for retailers with annual turnover not exceeding Rs 2 crore. In their cases the deemed profit would be just 8 percent of their turnover and to the extent their turnover is through banking channels just 6 percent. It couldn’t get better than this because it is common knowledge that the retail margin in India is very high with the mean rate being somewhere near 30 percent.

Professionals whose annual gross receipts do not exceed Rs 50 lakh, are deemed to have made a profit of just 50 percent of their turnover though it is common knowledge that professionals unlike traders have very little input costs and overheads thus leaving them with a very large net profit. And for the truckers, the applicable scheme says if it is a heavy goods vehicle, the profit shall be deemed to be an amount equal to one thousand rupees per ton of gross vehicle weight per month. If not a heavy goods vehicle, then seven thousand five hundred rupees per month.

India still a land of traders

India still remains a land of traders despite the visible inroads made into their turfs by ecommerce. And there are about 10 million trucks in India most of them in the unorganized sector with single truck owners predominating. So, the scope for collecting income tax from such segments is immense. But all schemes especially the ones involving cash outgo for their users need to be hard sold. We therefore need to put in place suitable interlocking mechanisms to enforce these schemes.

Trucks need pollution certificate. The authorities testing vehicles should be mandated with the duty to collect a partial advance income tax as well say Rs 5,000 per truck. And each truck owner must be mandated to obtain permanent account number (PAN) in order to be eligible for both the pollution certificate as well as receipt for payment of advance tax. Likewise, every retailer needs electricity for his shop. He, too, must be mandated to obtain PAN and all electricity discoms should be mandated to add a 10% income tax cess by way of advance payment of tax.

The point is it is not enough to launch schemes without putting in place interlocking mechanisms for their enforcement. The salaried class has by far the distinction of complying with the income tax law fully, thanks to the regime of TDS. The truth is the absence of such a foolproof regime for other classes of income is what is emboldening them to look askance at the taxman.

Presumptive tax schemes lack bite

The presumptive tax schemes lack the pincer or the bite or the interlocking mechanism. Obviously, it is impossible for every buyer to deduct tax at source while paying the retailer. Perforce, discoms have to step in and discharge this duty as labor of love just like employers who perform TDS function more as their corporate social responsibility. Ditto for environment law enforcers in case of trucks. Professionals too can be similarly targeted.

Bar Council of India, the Institute of Chartered Accountants of India as well as Medical Council of India should be mandated to collect ad hoc income tax of say Rs 10,000 along with the annual certificate of practice fees.

When tax (so what if it just ad hoc) has been deducted at source, the income tax department has him by the scruff of his collar. That puts the fear of God into the minds of tax evaders and they come forward to file their income tax returns as well as pay up the balance of income tax if any. Otherwise, it would be business as usual. TDS or TCS (tax collected at source) is a bulwark against tax evasion irrespective of whether one files return under normal provisions or under one of the presumptive tax schemes.

Till December 25 2021, 4.43 crore income returns were filed for the financial year 2020-21. The number includes a sizeable chunk of salaried class returns which have already been subjected to full tax (there is nothing ad hoc about the TDS from salaries) as well as refund claims.

Last year i.e. financial year 2020-21, the share of direct tax revenues in the total gross tax revenues was 4.7 percent of the GDP, whereas the share of indirect tax revenues was 5.4 percent of the GDP. This is a sad commentary on our tax policy which turns Robin Hood taxation on its head.

Warped fuel tax policy

As an economy moves into the super league of developed nations, it must have more by way of direct taxes. The heavy share of indirect taxes in the total taxation pie is largely due to the warped fuel tax policy that plucks the low-hanging fruit (inelastic demand) and rationalizes it as being necessary to fund welfare programs!!

Spreading the income tax net wider by roping in the hitherto difficult-to-tax segment by interlocking presumptive tax schemes with TDS is of course not the complete solution to correct this grotesque skew in our tax policy besides finding money for government programs. We also need to tax the capital market more fully. There is no reason why long-term capital gains from bourses must be let off with just a slap on the wrist---a flat 10% tax---when a salaried person pays income tax through her nose. Wealth tax and estate duty on the super-rich too must stage a comeback to complete the bouquet of direct taxes.

(The author is a veteran columnist and tweets @smurlidharan)

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Published on: Thursday, January 20, 2022, 09:50 AM IST