The author is director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi
Kelkar-I and Kelkar-II have been discussed in newspapers. Kelkar-I is the consultation paper prepared by the Vijay Kelkar task force on direct taxes. Kelkar-II is the similar paper for indirect taxes. Kelkar-I has four broad strands — simplification of procedures through a national tax information network, farm income taxation through an Article 252 resolution of the Constitution, slashing of rates and exemption removal for personal income taxation and similar provisions for corporate taxes. There is nothing more to say on these excellent suggestions. Instead, I will focus on some other interesting aspects of Kelkar-I that newspapers haven’t adequately reported. And I will do this through quotes from the consultation paper, since explanations are generally unnecessary.
“The Task Force recognises the proximate role of PAN in building up an effective taxpayer information system. Given the ongoing and new initiatives by the Ministry of Home Affairs for issuing a Citizen Identification Number and by the Ministry of Labour for issuing a Social Security Number, the Task Force feels that the use of PAN can effectively integrate, on the lines of the US Social Security Number system, multiple tasks of tax and commercial enforcement, targeting government subvention, improving governance and enhance national security, both at the Central and State level. We recommend that: 1) The PAN should be extended to cover all citizens and therefore serve as a Citizen identification number. This will obviate the need for the Home and Labour Ministries to issue new numbers. 2) Given the manifold increase in the coverage of PAN, the responsibility for issuing should be transferred to an independent agency outside the income tax department. However, the income tax department should have online access to the database for tax enforcement like any other agency.”
“In line with our view that the tax department should concentrate on its core functions, the department should be allowed to outsource data entry work and clear the backlog of returns (which number 2.5 crores) by end-February 2003.” Is this an estimate for February 2003' In any case, I hadn’t realized the figure was so large.
“At present, taxes are collected through approximately 10,500 bank branches. Since the proposed procedure requires banks to receive online payment, those banks that do not have adequate infrastructure for establishing online connectivity will be debarred from collecting taxes. Accordingly, the Government, in consultation with the Reserve Bank of India, should also consider paying higher charges for services rendered by banks.” Fine. These 10,500 bank branches are public sector banks and that is a problem I always face. I can’t pay taxes through my bank. So does this mean that the insistence on public sector banks will go' Perhaps there is such an implicit suggestion. But I wish the Task Force had made this explicit.
“The present requirement of obtaining a tax clearance certificate before leaving the country must be abolished. Nevertheless, in order to protect against a consequent loss of revenues, the income tax department may be allowed to notify the immigration/customs authorities to prevent any particular person from leaving the country if such person is considered to be an offender. As a result, the process of tax clearance (prior to travelling abroad) will require to be fulfilled as an exception as against the current practice of obliging everyone to comply with the procedure.”
“The Task Force also noted that the standards of accountability at the field formation level were considerably diluted since, inter alia, the performance targets, particularly those related to revenue collection, were unrealistic and thrust upon them. The field formations were either resigned to the failure of the targets or resorted to questionable practices to meet revenue targets divorced from underlying economic trends. The Task Force was informed that very often officers were (informally) directed to hold back refunds to boost revenue collection. Accordingly, it is strongly recommended that the revenue targets should be based on underlying economic trends.” We always knew this. But as far as I am aware, this is the first time that a government-appointed Committee or Task Force has acknowledged it.
“Income tax department, in public perception, is identified with ‘raids’. That is its identity. That is its most visible enforcement activity. Raid is conducted with the help and in the presence of police force. The search and seizure activity is immediately reported in the press, highlighting ‘big names’ and big amounts of undisclosed income. It also provides publicity to the concerned officer. The objective of the search is to ascertain facts and collect evidence of concealed income and to give a message that tax evasion will not go undetected or unpunished. But, in the course of the search as they are conducted, the main objective of the search team is to obtain a declaration of undisclosed income from the person searched. It confirms success of the raid. Further investigations are slowed down or abandoned. Often such declarations are ob- tained under pressure. They are retracted in subsequent proceedings. After the raid, the officers of the investigation in charge of the raid, call to their office the persons searched to understand from them the seized accounts and documents. They record further statements. Mostly, the objective of this exercise is to obtain declaration of undisclosed income. The officer, in charge of the raid, prepares a report on seized material in about 60 days, giving their own appraisal of the search and seizure, without any accountability for what he says or omits to say in the report.… The assessment is one sided, high pitched, completed in a hurry when it is getting barred by limitation, ignoring the contentions of the assessee.…In a search case there is no ‘real’ investigation. As a result, the assessment does not stand the test of judicial scrutiny in appeals. There is nominal revenue gain from the searched case.
“Overall, the contribution of searched cases to total revenue colle-ction is less than 1%….Today, in the income tax department the most sought after posting for most of the officers in any grade is to the search and seizure wing. The officers employ all stratagem to obtain posting to search and seizure wing. The reason is not that the search and seizure work provides high visibility with the sense of being in power, without accountability for acts or omissions but the main reason is that it is profitable. The department gives handsome rewards to members of search team based on seizures and revenue realisations.” Any comment is unnecessary.
“Under the Income Tax Law in India, the tax base of a taxpayer is effected by the residential status enjoyed by him. A taxpayer could have one of the following three residential status:- Resident : A taxpayer is treated as a resident if he is: (a) Resident in India for 182 days or more during the financial year; (b) In India for a period of 60 days or more during the financial year and resident in India for at least 365 days in aggregate during the preceding four financial years.
“Resident but Not Ordinarily Resident: A taxpayer is treated as resident but not ordinarily resident if he is: (a) Resident in India for less then 9 years out of the preceding 10 financial years; or (b) Resident in India for a period or periods amounting in all to less then 730 days during the preceding 7 financial years. Non Resident: A taxpayer is treated as non resident if he is neither a resident or resident but not ordinarily resident. Residents are subject to tax on their worldwide income. Persons who are resident but not ordinarily resident are taxed only on Indian-sourced income, Non-residents are taxed only on Indian-sourced income and on income received, accruing or arising in India.
“Persons who are resident but not ordinarily resident, enjoy exemption in respect of their foreign sourced income, even though in qualitative terms they are no different from residents. To the extent that most double taxation avoidance agreements provide for taxation of interest income in the country of residence, persons who are residents but not ordinarily residents enjoy exemption from foreign tax by claiming to be residents in India for the purpose of a treaty. Thanks to this peculiar category, therefore, a large number of such taxpayers end up paying no tax on their foreign sourced income, either in India or in any other part of the world.
“Further, most countries across the world provide for only two status: Residents and Non-Residents. Accordingly, the Task Force recommends that residents but not ordinarily residents must be subjected to tax on their global/ worldwide income at par with residents. To do so, this unusual category of resident but not ordinarily resident taxpayers must be deleted.” If this is indeed done, hell will break loose in some segments of the corporate world.
“In conclusion, the Task Force is convinced that if its recommendations are adopted in toto, our tax system will become more transparent.” True. The problem is with the toto part.