By Anusmita Mazumder, Department of Law, University of Calcutta.
Just a few days ahead of the Union Budget 2016-17, a committee was asked to make necessary recommendations for simplifying the current Income Tax Laws, which accordingly has recommended a higher threshold for deduction of tax at source and cuts in rates, plus measures to reduce litigation. The 10-member panel is chaired by Mr R V Easwar, a former High Court Judge. Appointed in October, 2015, the panel gave its first 78 pages report on January 18, 2016. This report is a draft issued to elicit feedback before finalization. Comments and feedback had been invited to make alteration additions, if any, till January 23 after which the panel is to submit their final report on January 31, 2016.
The system of taxation in India has always been very complex and intricate from the legal point of view. Taxes in India can be broadly classified into direct and indirect taxes. Direct taxes include the income tax, wealth tax and interest tax. Indirect taxes are excise duty, service tax, VAT, sales tax, etc. Direct taxes are the most prominent and important source of revenue for the government; the major form being income tax. The levy of income tax is governed by the Income Tax Act, 1961. Wealth tax falls under the Wealth tax Act, 1947 and interest tax under the Interest Tax Act, 1974. In addition to these, the Finance Act lays down the income tax rates and gives effect to the financial proposals of the Central Government at the beginning of every Financial Year.
The Easwar Panel Report
The report aims at simpler areas of taxation which it considers require immediate attention of the authorities. It focuses on changing the direct tax laws and has suggested several taxpayer-friendly measures to improve the ease of doing business, reduce litigation and accelerate the resolution of tax disputes. It has suggested 27 amendments to the Income Tax Act, 1961 and 8 for reform through administrative instructions. The major points suggested by the panel are:
- The report says nearly 65% of personal income tax collection in India is through tax deducted at source (TDS) and the provisions in this regard needed to be made more tax friendly and less ‘tedious’.
- It provided for ‘enhancement and rationalization’ of the threshold limits. TDS rates for individuals and Hindu Undivided Families (HUFs) should be reduced to 5% from the present 10%. Presently, TDS is applicable on “such tiny annual limits” of Rs 2,500 in case of payment of interest on securities and on interest on NSS accounts, Rs 5,000 for payment of interest on private deposits and commission or brokerage and Rs 10,000 for payment of bank interest. “Considering the importance of the long overdue revision of these puny limits, the Committee has recommended suitable hikes in such threshold limits,” the report said. For interest on securities, it proposed raising the threshold for TDS to Rs 15,000 from Rs 2,500 annually and halving the tax rate to 5%. Similarly, for other interest earnings, the limit is recommended to be raised to Rs 15,000 from the current Rs 10,000 for bank deposits and Rs 5,000 for others.
- The panel recommended raising TDS limit for payments to contractors from current limits of Rs 30,000 for single transaction and Rs 75,000 annually, to Rs 1 lakh annual limit.
- The limit on rent income threshold for TDS is proposed to be raised from Rs 1.8 lakh annually to Rs 2.4 lakh.
- The threshold for fees for professional or technical services is recommended to be raised to Rs 50,000 from Rs 30,000 but the TDS rate is proposed to be retained at 10 percent.
- As regards refunds, the Committee recommended that monthly interest on refunds should be payable at the rate of 1% if the return is processed after 6 months or issued anytime after the end of the 6 month period.
- Monthly interest of 1.5% if the return is processed after 12 months from the end of the month in which the return is filed or issued anytime after the end of the said 12 month period.
- The panel also said that the refund due should be issued to an assessee within maximum 6 months from the month of filing tax return. It gets delayed when a scrutiny notice is issued. However, section 143(1D) of the IT Act says that processing of a return is not necessary, where a scrutiny notice has been issued to the assessee. The panel thus proposed that Section 143(1D) should be deleted with effect from June 1, 2016.
- Amendment to IT Act is to be made to provide an opportunity to the assessee to make a fresh claim during the assessment proceedings. However, such a claim should also be verified and any wrong claim made by the assessee should also be subject to penal provisions.
- Non-residents not having PAN should be allowed to furnish tax identification number from the country of residence.
- Doing away with the discretion given to tax assessing officer to classify equity trading income as business income or short/long term capital gains. The move to make annual income of less than Rs 5 lakh made on equity trading as short-term capital gains would help reduce litigations and bring in more retail money into the stock markets.
- It suggests an increase in the annual turnover limit for tax audit applicability from Rs 1 crore to Rs 2 crore for a business and Rs 1 crore for professionals.
- Professionals with gross receipts up to Rs 1 crore may be given the facility to show just 33.3% of the receipts as income and pay tax on the same at the applicable rate, instead of going through the rigmarole of getting expenditure to that extent certified by the taxman.
- Tax on short term capital gains is levied at 15% plus surcharge, while business incomes are taxed at maximum rate of 30% plus cess.
The report has been received well by most tax analysts of the country. “Some of the substantive recommendations are really pragmatic. Notably, the recommendation to defer ICDS is laudable, as is that on simplifying the classification between capital gains and business income,” said Ketan Dalal, senior tax partner, PwC India. Dalal expects a second set of recommendations to include Section 9 of the IT Act along with international tax. KPMG (India) Partner, Vikas Vasal, said that the recommendations seek to address many of the ground level issues being faced by the taxpayers. “Some of the procedural reforms on tax deduction at source and e-governance initiatives in the report, if implemented, will help improve the business sentiment in the country,” he said. Nangia & Co Managing Partner, Rakesh Nangia said: “If the recommendations of the committee are put to action, it can go a long way in giving the much awaited paradigm shift in the image of tax system in India”. “These suggestions will help to reduce litigation on some of the common controversies. It will be interesting to see whether these suggestions are accepted by the government when the Finance Bill is announced,” said Rajesh H Gandhi, Partner, Deloitte Haskins & Sells LLP.
The suggestions of the panel are believed to bring about substantive changes to tax policy which could be addressed in the upcoming Union Budget in February 2016. The panel has also laid down a detailed roadmap on administrative measures which the government may take outside the Budget for ease of doing business. The panel has already started deliberations on the second set of recommendations which are likely to come in the next two and half months.