Needless Presumptive Taxation
Small traders and other self-employed taxpayers find it difficult to maintain elaborate accounts. So very often, the level of taxable income is based on negotiations between the tax payers and the tax official.
The concept of presumptive taxation has gained popularity, especially in developing countries where various groups of small traders and the self-employed fall in the hard-to-tax category due to their presence in large numbers, illiteracy, low tax morality and inadequate tax administration.
Various countries have attempted to tax income on a presumptive basis. The subject has received considerable attention from public finance scholars and policy makers for many years. However, there has been a gradual transition in both legislation and administration from an income concept that was determined on the basis of indices like value of land, standard of living, family wealth, and number of doors and windows in the taxpayers residence, where at least the intention was to impose tax on the actual income received by the individual taxpayer. These are important yardsticks when the emphasis is on taxing real income. Generally tax laws are written as if the tax is imposed on well-defined and personalised measures of income.
But in developing countries, small traders and other categories of self-employed taxpayers find it difficult to maintain elaborate accounts and submit these to the tax department. Hence, they are taxed on the income that is derived from general indices. Very often, the level of taxable income is based on negotiations between the taxpayers and the tax official. Most often, these negotiations are conducted without solid facts. Even some developed countries like France and Italy rely on presumptive concepts for a certain part of their income tax system.
In India, a beginning was made in 1992, when Chapter XIIC was introduced in the IT Act for persons in professions like retailing or vocations like tailoring, hair-cutting, typing and photocopying. Special provisions have been enacted for computing profits and gains in the civil construction business (Section 44AD), for persons deriving income from plying, hiring or leasing goods carriage (Section 44AE) and so on. But these have not been very successful.
In the realm of presumptive taxation, there have been practically no instances where incomes were computed on the basis of real income though expenses were allowed on a presumptive basis. This fact was highlighted in the recent report of the Income Tax Expert Group.
The group has suggested a new provision for professionals that includes in the Act all those in legal, medical, engineering, accountancy, architectural, technical consultancy, interior decoration or any other profession notified by the central government. To simplify matters, it is proposed to allow them to claim a specified percentage of their gross receipts as deduction to cover expenses and depreciation on assets. The percentages will be specified by the central government after consultations with professional bodies in respect of which the provision of presumptive taxation is to be extended.
To start with, this provision of presumptive taxation will be extended only to those professionals whose gross receipts do not exceed Rs 10 lakh in a financial year. The group is of the view that such a provision will ensure better compliance by professionals. This scheme is optional, though. In other words, those who do not claim the specified percentage of their gross fees as deduction will be required to show their correct profits by producing all their books and supporting documents and vouchers before the assessing officer. They will also need to have their accounts audited by a chartered accountant and will be covered by the provisions of Sections 44AA and 44AB.
This new provision is, by itself, contradictory. If a person can keep a record of gross receipts, which is the credit side of his cash/bank accounts, he could as well write the debit side detailing expenses.
In most cases, professionals are capable of maintaining books and filing regular IT returns. Their taxable capacity places them in the middle or even upper ranges of the scale of tax payers. For this reason, professionals do not need a preferential tax treatment as proposed. Rather, they should be required to pay taxes in line with the normal rates established under the regular system. Steps should be taken to improve their tax compliance rather than make them sluggish, complacent and casual about their tax liabilities.
Moreover, even if there are presumptions regarding expenditure, enquiries will be necessary to find out whether the receipts against which a specified percentage of expenditure has been claimed have been correctly stated. If such enquiries are necessary, it would be easy enough to make enquiries about expenditure as well. Hence, an allowance for expenditure, whether incurred or not is, on the face of it, unjustified. In this context, it may be mentioned that P K Sahu has correctly opposed this idea in his dissenting note.
According to Sahu, this suggestion prescribes a needless exercise as it does not address the real problem of under-reporting of receipts.
And finally, the most objectionable feature of the report is the intimidating approach concerning maintenance of accounts and audit in case a taxpayer is not prepared to fall in line with the tax departments approach to taxation. A similar approach has been adopted concerning civil contractors Section 44 AD. This recommendation has since been implemented. It has also been adopted for Section 44AE (concerning assessment of income of truck business) and for the newly introduced Section 44AF relating to computing income of retail traders at the rate of 5 per cent.
The proposed scheme for professionals is intended to substitute legal provisions for what should be taken care of by investigative functions for a class absolutely capable of discharging its tax obligations correctly and hence is, obviously, uncalled for.