'Include agricultural income in the tax base'

'Include agricultural income in the tax base'
Bengaluru-based M Govinda Rao is a  policy maker and the member of 14th Finance Commission. In an interview with Furquan Moharkan of Deccan Herald, Rao says tax system should be kept simple and transparent.

Will the Finance Minister’s roadmap of 25 per cent corporate tax, and phasing out of exemptions help to increase the tax base and reduce distortion?

The decision of the Finance Minister to broaden the base and reduce the rate of corporate tax is very welcome. The best practice approach to tax reform is to broaden the base, reduce the rates and keep the tax system simple and transparent. It is important to levy the tax at low rates because capital is mobile and tax rate is an important factor in investment decisions.  
What specific suggestions would you make to reduce distortions in the direct tax which are believed to help only large business houses?

Distortions from a tax are for exemption and concessions given in pursuit of various objectives.  In Indian income, tax policy has been loaded with several objectives. These include encouraging scientific research and development, promoting social and economic upliftment, and promotion of charitable trusts, among others  These tax preferences result in complicating the tax system. Having said that, I would say that even though some of the objectives are laudable, they should be dealt with through some other way and not tax concessions.

Will 25 per cent corporate tax make India a global low-tax regime among the major economies? How do you do you see it playing out in terms of increasing the tax base?
We must note that the tax rate is an important determinant of investment. In fact, ASEAN countries have lower rates.  The rate in Thailand is 20 per cent, in Singapore it is 17 per cent, in China it is 25 per cent and in Russia, it is 20 per cent. Therefore, the decision to phase out the tax preferences and reduce the rate to 25 per cent is welcome, at least to keep the foreign investment flowing in.

Which are major provisions in the IT Act that are creating maximum misinterpretations and litigations?

We all know that Income Tax Act of 1961 has undergone several amendments, and is very complicated. It is important to clean it up to make simple; minimise the exemptions and concessions; and reduce the rates and rate differences. The law should be clear, avoid discretionary powers of the tax officials and avoid ad hoc decisions by the policy makers.  I think that once tax concessions and exemptions are removed, distrotions will be minimised.

Is it true that the disputes over the cross border taxation and transfer pricing are among leading components of litigation in India. Will the simplification of IT Act reduce such litigation?

Let me be clear that tax avoidance by multinationals is a global phenomenon.  Developing countries lose much needed revenue in it, thus it is a cause of concern. The studies have shown that the effective tax rate paid by multinational companies is much lower than that of the domestic companies. MNCs indulge in tax abuse in a variety of ways. This concern about tax abuse by multinational companies has led the G-20 to ask the OECD to prepare an action plan to deal with the Base Erosion and Profit Shifting. The OECD has submitted a 15-point Action Plan to prevent tax abuse. But concern here is that many developing countries feel that the OECD action plans doesn’t take care of their considerations.

  Civil society and labour organisations have separately appointed an Independent Commission for the Reform of International Corporate Taxation to make recommendations on the issue.  I am a Member of the committee, and we have made a set 34 recommendations to avoid tax abuse

The salaried-class feels that they are the ones who bear the maximum burden of direct taxes. How can taxation structure for salaried employees be improved?

It is natural for the salaried-class to feel that. While the rest evade taxes, they have to bear them. That is precisely the reason why the tax rates should be kept at a reasonable level. It is also important to index the exemption limit and the tax brackets to avoid “bracket creep”.  The introduction of GST and matching the GST numbers with PAN could be a game changer in terms of improving tax compliance by the non-salaried.

The salaried-class feels that large section of wealthy rural inhabitants are out of the tax net. What can be done to widen the tax net among the affluent farm owners?

It is not just the wealthy rural inhabitants who are out of the tax net.  Many urban businessmen also acquire farm houses to misclassify their non-agricultural incomes to evade the tax.  The exclusion of agricultural incomes is a major avenue for evasion and avoidance.  The final solution can include agricultural income in the tax base after making adequate provisioning for farming costs and insurance.

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