- Wealth PMS
In Capital Mind we start a series of posts on the economic future, and what policies must be adopted by whichever party will form the next government. We will tag these posts “EcoManifesto” and eventually have this wonderful long list that we hope will change the future of India’s economy. This is not an unbiased view – we are on the side of free markets and a freer economy which for the sake of not confusing us with religious bigots, I will call the “Not the Left”.
The nature of politics in India is that all discourse is brought down to levels of name calling, strawman arguments, ad-hominem or simply a class divide. Like:
In that context, we will be a breath of fresh air to the argumentative process. And I encourage all of you to chime in. (Only the above kinds of needless arguments will be mercilessly moderated.)
There are a lot of unnecessary subsidies out there. If your parents need an operation, there’s an obscure section of the tax law that allows you to claim that amount as non taxable. You can buy insurance, certain equity mutual funds, 5 year fixed deposits, pay for your kids education or pay your housing loan principal with a total cap of 100,000 per year.
This is unnecessarily complicated. We should abolish every single such exemption.
This also means there is no special treatment for women or senior citizens or any caste or creed. There is no “Cess” It’s as simple as that.
To achieve this, we will need to:
We currently have five heads of income in the tax code: Salary, House property, Business income, Speculation, and Income from race horses or such.
These are unnecessary. We should simply have Salary and Business, and that’s it. There should be a one page tax form for those who have only salary income:
That’s it. In fact this form can be prefilled – the minute you log in to the Income tax department web site, they know the income you’ve made, and the tax you’ve already paid, and all you need to do is “Okay, that’s it”.
People who have Business Income of any sort get a more complex form, but even that is easy to fill because there are no exemptions. Businesses need audited balance sheets above Rs. 1 crore in income, but below that can be unaudited income statements (Gross Revenue, Expenditure, Depreciation, Interest)
All direct subsidies paid to individuals or businesses will have their PAN/Aadhaar, so they will automatically be added to income, whether you like it or not.
Investing in certain businesses will need to be encouraged. But we should not provide tax exemptions. Instead, since all business (including farming) requires investment, we should accelerate the depreciation on those investments. So a tractor on a farm should get 100% depreciation, just like you have for seeds or for labour costs.
Housing in rural areas for renting can be given higher depreciation in order to offset rental income.
All depreciation of this sort should have an automatic end date of 3 years. Extension is only one year at a time. As a policy we should have no open ended schemes at all.
If you are salaried, you pay very high taxes as a percentage of your income. Because
the businessman can claim the petrol he spends on to travel to work as his expenses, but you cannot. Or some of his rent, his travel, his driver, his purchases and so on. But the salaried employee does not.
The offset is the Rs. 500,000 exemption he gets without paying taxes. That’s Rs. 40,000 a month that a business has to pay tax on, but individuals with a salary do not.
However, businesses (remember even farming is a business now) will always retain a tax advantage, and that’s not bad at all. This should eventually encourage small business and startups.
We spend a lot of money just recovering taxes. Reduce the tax collection staff to a lower number, using technology. Increase the amount you pay tax officials, but reduce their headcount. Increase the headcount of those that handle appeals.
Keep income tax officials fully accountable, with a chain of command that allows only transparent tax decisions. (I.e. no “closed door” settlements with tax lawyers and the government).
We should also keep increasing clarity where required and operate on a “principles” basis at other times. For instance, it’s difficult to note all types of income tax fraud, so certain expenses may be removed by tax officers; however, you can appeal faster as there are more appeals officers.
That’s self explanatory. Don’t tax us for something in the past even if it is only a clarification. (Unless that clarity benefits the taxpayer)
Comments? Additions? Please comment here, or tweet to @deepakshenoy.
Much more to come.