The Direct Taxes Code Bill, 2010 (DTC) seeks to reach out to the diehard tax-evaders in business by offering them virtually an olive branch, if not by raising a white flag. On a turnover up to Rs 1 crore — as against the extant norm of Rs 60 lakh — one can get away with a tax on Rs 8 lakh with the profit being presumed at 8 per cent of turnover. In other words, the presumed profit margin for those in business would be deemed to be just 8 per cent, irrespective of the nature of business.
Professionals kept out
The pristine original draft of the DTC reached out to professionals too but the enormity of the giveaway was perhaps realised in the nick of time. Professionals have been kept out of the purview of presumptive taxation by DTC. This is as should be because professionals in view of their exalted status ought to behave more responsibly and maintain proper account of their profits. Moreover, the original version of the DTC committed the mistake of presuming the same profit margin for both professionals and businessmen whereas the truth is professionals enjoy a considerably higher profit margin with bulk of their expenditure being their own cerebral energy. Presumptive tax scheme incentivises a businessman to make use of the scheme if his profit rate is higher than the presumed rate. It is common knowledge that the 8 per cent deemed profit leaves a lot on the table for the businessman. Intuitively, therefore, the scheme ought to be lapped up with alacrity and gusto. A trader with a turnover of Rs 1 crore would pay a tax of Rs 90,000. He could not have asked for more. But if one has to go by past experience, businessmen have always got away lightly under the income-tax law so much so that during the long years when the presumptive taxation scheme has been in vogue, practically nobody has come forward to make us of the scheme which is actually a semi-amnesty scheme, as it were. What has been emboldening them to cock a snook at the scheme is the smug belief that the department would not care to carry its war into their camp. Having liberally hiked the threshold limit for participation in the scheme to Rs 1 crore, the Government would have been perfectly justified in reading the riot act to them but alas that is not to be.
Punishment threat
The best way to activate a scheme is to use it as both a carrot and stick. Those who are cosseted with a soft tax ought to be reminded that they cannot push the envelope further. It would not at all be unjustified or unreasonable to tell them that in case they don't pay even the soft tax, they would have to pay twice the normal tax. In the above example, if the turnover of the delinquent trader is indeed Rs 1 crore and he thumbs his nose at the scheme besides not filing a regular return, he should be prepared to pay a tax of Rs 1,80,000 in addition to the interest and penalty otherwise payable. And as a final and conclusive deterrent, he should be debarred from participating in the scheme in future. Presumptive tax schemes have been floundering on the rocks of slack, nay, lack of, implementation. One wishes that along with the framing of the scheme, the DTC had also chalked out the steps to be taken to enforce it. There is no reason why the database for the Income-Tax Department should also not comprise the database of the sales tax or excise department and vice-versa. Revenue departments should not function as watertight compartments. A lot of information can be gleaned from access to each other's data base. But then in a milieu where the income-tax officer does not make use of the information available to the wealth tax officer — when both functions are discharged by the same person one can understand why there is no interdepartmental coordination in the country. But if the Government is serious about widening the tax base through the presumptive tax scheme not only to increase revenue but also to bring about horizontal equity, it must think in terms of some interlocking mechanisms that would take the scheme forward
Professionals kept out
The pristine original draft of the DTC reached out to professionals too but the enormity of the giveaway was perhaps realised in the nick of time. Professionals have been kept out of the purview of presumptive taxation by DTC. This is as should be because professionals in view of their exalted status ought to behave more responsibly and maintain proper account of their profits. Moreover, the original version of the DTC committed the mistake of presuming the same profit margin for both professionals and businessmen whereas the truth is professionals enjoy a considerably higher profit margin with bulk of their expenditure being their own cerebral energy. Presumptive tax scheme incentivises a businessman to make use of the scheme if his profit rate is higher than the presumed rate. It is common knowledge that the 8 per cent deemed profit leaves a lot on the table for the businessman. Intuitively, therefore, the scheme ought to be lapped up with alacrity and gusto. A trader with a turnover of Rs 1 crore would pay a tax of Rs 90,000. He could not have asked for more. But if one has to go by past experience, businessmen have always got away lightly under the income-tax law so much so that during the long years when the presumptive taxation scheme has been in vogue, practically nobody has come forward to make us of the scheme which is actually a semi-amnesty scheme, as it were. What has been emboldening them to cock a snook at the scheme is the smug belief that the department would not care to carry its war into their camp. Having liberally hiked the threshold limit for participation in the scheme to Rs 1 crore, the Government would have been perfectly justified in reading the riot act to them but alas that is not to be.
Punishment threat
The best way to activate a scheme is to use it as both a carrot and stick. Those who are cosseted with a soft tax ought to be reminded that they cannot push the envelope further. It would not at all be unjustified or unreasonable to tell them that in case they don't pay even the soft tax, they would have to pay twice the normal tax. In the above example, if the turnover of the delinquent trader is indeed Rs 1 crore and he thumbs his nose at the scheme besides not filing a regular return, he should be prepared to pay a tax of Rs 1,80,000 in addition to the interest and penalty otherwise payable. And as a final and conclusive deterrent, he should be debarred from participating in the scheme in future. Presumptive tax schemes have been floundering on the rocks of slack, nay, lack of, implementation. One wishes that along with the framing of the scheme, the DTC had also chalked out the steps to be taken to enforce it. There is no reason why the database for the Income-Tax Department should also not comprise the database of the sales tax or excise department and vice-versa. Revenue departments should not function as watertight compartments. A lot of information can be gleaned from access to each other's data base. But then in a milieu where the income-tax officer does not make use of the information available to the wealth tax officer — when both functions are discharged by the same person one can understand why there is no interdepartmental coordination in the country. But if the Government is serious about widening the tax base through the presumptive tax scheme not only to increase revenue but also to bring about horizontal equity, it must think in terms of some interlocking mechanisms that would take the scheme forward
