The budget’s redundant window

After wasting much time shuttling between two windows of the same government department and what is effectively another government department, I gave up and did what I should have done in the first place. I resorted to a tout who got everything done. Touts are ostensibly banned. But not driving schools that are really touts masquerading as driving schools. One original FIR should have served the government perfectly well. That’s necessary information. The second is irrelevant. Insisting on unnecessary information inevitably leads to harassment, even if the intention was laudable.

I am reminded of my RTO experience because of a provision in the budget that has already been flagged in the media. I am referring to the new Section 285BA that requires an annual financial return if the aggregate value of transactions in a financial year exceeds Rs 50,000 “or such higher value as may be prescribed”. This becomes applicable from April 1, 2004, and the information has to be provided “in such form and manner as may be prescribed”. This includes a floppy, magnetic cartridge tape, CD or any computer readable media. Notice the definition of financial transaction. This “includes (a) a transaction of purchase, sale or exchange of goods or property or right or interest in property; (b) a transaction for rendering any service which may be prescribed; (c) a transaction under a works contract; (d) a transaction by way of an investment made or an expenditure incurred; or (e) a transaction for taking or accepting any loan or deposit”. Failure to comply may attract penalty of Rs 100 a day. We have to wait to see what form Section 285BA eventually takes. But on the face of it, the definition of financial transaction is vague enough to cover everything under the sun.

We know there is tax evasion. We know the tax/GDP ratio needs to increase to allow the government to do the things it should be doing. However, is Section 285BA the answer? The problem seems to partly originate with the Kelkar Task Force’s report. I don’t mean the new Task Force of July 2004 on implementing the Fiscal Responsibility and Budget Management Act, but the earlier one of December 2002 on direct taxes. That said PAN (permanent account number) should become like a citizen identification number and “the requirement of quoting PAN may be expanded to cover most financial transactions”. Nothing wrong with that. PAN should be mandatory whether you are an income tax assessee or not and quoting PAN numbers mandatory across a whole variety of transactions, provided of course there are systemic improvements and there aren’t large delays in issuing PAN numbers.

Unfortunately, the Kelkar Task Force didn’t stop at that. Here are two quotes from that report to illustrate why one can arrive at something as bizarre as Section 285BA. “These (taxpayer) returns contain valuable information on the taxpayer and his activities. All this information can potentially be used to help gauge the taxes due from the taxpayer. However, the Task Force was apprised that tax administration was unable to digitise the information since the staff in the income tax department, despite training in computer skills, is at the lower end of the learning curve.” In addition, “the CIB (Central Information Branch) is not able to collect information from even the major external sources every year. The inability to collect annually comprehensive information from all or at least the major sources dilutes the efficacy of CIB verifications.” I am not being uncharitable, but here is what this means. The sensible idea of quoting PAN is not enough because the government won’t be able to process the information. This is like one window of RTO not talking to the other one. You might as well ask the citizen to process the information for you. And because tax administration has no computer skills, ask for the information on floppies, CDs and what have you.

The chartered accountant who files my income tax returns has a theory. Over-pay taxes, because then the refund will prove that the tax department is content with what you have paid. Somehow that calculation went wrong last year and I under-paid. Nothing wrong with that either. You pay when there is a demand. But there was a problem because we shifted house exactly eight years ago. My PAN card has the new address, so do my income tax returns. Eight years is long enough for any databases to be corrected. However, the people who issue the demand still have the old address and all hell broke loose because I was ostensibly ignoring the demand letters, which were being redirected because the addressee was unknown. So much for computerisation within the IT department. To me this is symptomatic of the harassment we will let loose courtesy this new section. In a perverse kind of way, we are admitting we can’t improve compliance of direct taxes, especially income taxes.

Every economist argues direct taxes are more efficient compared to indirect taxes and serve equity interests better. But indirect taxes enforce themselves, especially if we eliminate exemptions and move taxation to consumption, as the integrated VAT (value added tax) is supposed to do. In that case, how about abolishing income taxes and switching to indirect taxes? That’s a less hare-brained idea than Section 285BA.