A taxing analysis of global best practices

Tax on incomes is an important source of revenue for governments in various countries. The basic objective of taxation is to raise the money needed to finance government expenditure.

Direct taxes like income tax generally tend to be, in aggregate, progressive. However, such taxes have other effects too. Direct taxes serve several functions in addition to financing federal government expenditure.

These tend to allocate resources, encourage or discourage certain kinds of economic and social behaviour, redistribute income and wealth and stimulate and stabilise economic growth.

Through the mechanism of tax incentives, direct taxes can even help solve certain specific and social problems, such as checking pollution, alleviating housing shortages, encouraging education, helping weaker and handicapped sections of society and so on.

Thus, starting from the necessity of collecting revenues for the government to meet its expenditure, taxation has developed into an instrument of promotion of social and economic growth, stability and efficiency and has become a major device for governments to implement their political thinking and secure the participation of the masses in their policies and programmes. An effectively administered tax system in the hands of the government becomes a major weapon against many odds.

In this context, a comparative study and analysis of the taxes and tax laws of other countries can provide invaluable insights for the implementation of tax laws.

Such an exercise is particularly useful for tax policy makers and administrators allowing them to draw on the tax experiences of other countries against the appropriate economic background. The usefulness of Ms Jain's book is to be judged from such angles.

The book provides the salient aspects of the income tax provisions of six countries "" three developed ones (the UK, the US and Australia) and three developing countries (Malaysia, Pakistan and India).

The book is divided into 10 chapters. Chapter 1 introduces the relevant tax concepts. Chapter 2 examines various aspects of the income tax system, including the income base, tax unit, residential status, tax rate structure and tax-free threshold in the selected countries.

Chapter 3 compares provisions relating to salary income, including retirement benefits, fringe benefits, taxability of car benefits and rent-free accommodation.

Chapter 4 analyses provisions relating to the computation of depreciation allowance in respect of plant and machinery and buildings, balancing adjustments and carry forward of unabsorbed depreciation.

Chapter 5 evaluates the provisions relating to the computation of capital gains, indexation allowance, capital loss adjustments and capital gains tax reliefs. Chapter 6 deals with various types of income tax incentives, namely, social-welfare reliefs, investment-related and business-related incentives.

Chapter 7 makes an appraisal of the provisions relating to corporate tax rates, chargeability of dividend income and minimum alternate tax. Chapter 8 focuses on various aspects of assessment procedures, including filing of tax returns, self-assessment, regular assessment, negotiated settlement, appeal procedures, income-escaping assessment and search procedures. Chapter 9 examines the provisions relating to the payment of interest, penalty and prosecution applicable in selected countries. Chapter 10 draws conclusions from the study.

The author has done an excellent job of making a comparative study of the tax laws of six countries. Some aspects that emerge from this study and can be considered by the Government in the context of the country's Income Tax Act are :

In the US, tax is levied on the worldwide income in the hands of the citizens of that country. Whether instead of having three categories of taxpayers "" residents, residents but not ordinarily residents and non-residents "" there should be only two categories namely citizens and non-citizens. This would bring simplicity to the law.

The study shows that tax rates in developed countries are generally higher than those in the developing countries. India can work out mean rates keeping in view the rates in such countries.

The study raises the issue of whether the country's income-tax laws "" tax rates, tax brackets, exemption limits "" need to be indexed in view of the rising trends of inflation.

The law relating to taxation of perquisites need to be reviewed keeping in view the laws in other countries.

The study shows that despite the proclaimed virtues canvassed for the elimination of tax exemptions, incentives, concessions, etc no country in the world has been able to completely do away with these as suggested by the Kelkar committee.

The study shows that India could benefit greatly if it followed the system of selecting cases for scrutiny in the US and Australia, which is considered more scientific.

The study has revealed that search provisions under the Indian income tax law are harsher than in other countries. Similarly, the book shows that the penalty and prosecution provisions applicable in India are comparatively harsh.

The book reflects the author's arduous research in global tax laws. It provides, at one place, all the relevant information concerning the tax practices of developed and developing countries.

However, given the nature of the subject, the book will need to be updated frequently. If that is done, Ms Jain's work will be a storehouse of information on the subject of income tax, which has always bewildered taxpayers and tax administrators.

TAXATION OF INCOME:
An International Comparison

Indu Jain
Manohar Publishers & Distributors
Pages 422