'Mat Should Be Abolished'

Q. Can the law really be significantly simplified in just four and a half

months ?

A. There is no point in re-writing everything. We are practitioners of tax laws and know where the complexities lie. So we are trying to plug loopholes, reduce litigation, make the law more implementable and also tax payer friendly.

Take house rent. Because of outdated rent control laws, the commercial rents is ridiculously low. So people take large deposits, and charge small rents. We have proposed that 15 per cent of the deposit amount be deemed income. Maybe double taxation can be avoided if the deposit is invested in tax free bonds. Another example of a loophole is the sale of property where the value shown is ridiculously low. If the stamp duty authorities show a higher value, we will go by the higher value.

 

Q. You have made changes in tax computation in case of salaries.?

A. Wherever the tax payer has a raw deal, the idea is to give him full benefit and also simplify computation procedure. Allowable HRA will be a straight 40 per cent of basic and LTA will be exempt till economy class air fare. Currently, medical re-imbursement is exempt upto Rs 10,000 p.a. and this is meant to cover your spouse, yourself, aged parents etc. We have recommended that it be raised to 30,000. Hospitalisation in a Government approved hospital is now tax exempt. We think that expenses should be fully exempt even if incurred in any private hospital approved by the Chief commissioner of IT. A car given as a perk will be taxed according to the engine size. Someone who drives a Mercedes should pay a higher tax.

Q. You are talking about making public and private sector employees

equitable ?

A. A Government employee occupying a bungalow in a prime locality pays a notional pittance as rent. Whereas a private sector employee ends up getting 10 per cent of salary plus the difference between the rent and sixty percent of his salary as taxable income. We have decided that it should be a simple 10 per cent of basic. In any case after this pay commission report is implemented salaries will be comparable. We are also modernising -stock options, free rail tickets or air tickets will also be taxed.

Q. Isn't it unfair not to allow setting off the house -financing loan interest for self-occupied accomodation?

A. Under the current law, one is allowed to set off upto Rs 15,000 against other income. That is quite low but the Government can increase it.

Q. Section 80C, was changed to section 88. You have proposed that it be

reversed again ?

A. I have no idea why it was. We think it is simpler than the present system. The proposed system allows a deduction of upto Rs 1 lakh from taxable income under section 80C for savings in some schemes. Savings allowed under this head will now include investment in primary issues of companies engaged in financing or providing infrastructural facilities and mutual funds dedicated to infrastructure development.

Q. What are the changes in the capital gains section ?

A. The changes are friendly and are likely to reduce litigation. Take the case of long term capital gains on non-financial assets, for example inherited jewellery, where you don't know the cost. If the asset is more than 8 years old, the cost of acquisition is to be taken as 60 per cent of the sale. Fifty per cent of the remaining 40 per cent is exempt and hence 20 per cent of the sale will be taxed at 30 per cent. This amounts to just 6 per cent of the sale at the margins. In case the assets is between 3 to 8 years old, the tax incidence will be 7.5 per cent. The law is so reasonable that it is easier to pay tax.

In case of financial assets, the tax payer has to declare a block of tradeable assets. There will be no capital gains tax as long as the profits are re-invested in the capital market and the block is positive. The implication of this are manifold. Portfolios can be freely re-organised and family businesses can re-structure themselves. It is also a growth impetus for the capital markets. Another change is that deep discount bonds are going to be treated as capital gains when redeemed. This is to avoid confusion about reversing taxed accrued interest if the bond is sold before redemption.

Q. What if the law changes again ?

A. Higher rates are now out of the question. There may be concern that earlier assessments may be re-opened. But the Department has assured us that will not happen. And, you could lose everything if you don't declare.

A doctor I knew had opened fictitious deposit accounts and left the deposit slips in a vault.. A clerk swindled him and he could not file a case. The revenue department has computerised in all metros. They have already compiled a database of overseas travellers from the dis-embarkation cards with immigration and of car owners from insurance companies. The cost, if you are caught, is much higher.

Q. Under section 28, shares with blank transfer forms are going to be

treated as profits from speculation?

A. This is to encourage people to transfer shares to their name. Blank transfer forms are like currency and generate black money. The scam of 1992 was caused by blank transfer forms. The implication is that if there is a loss, it can only be set off against speculative profit.

Q. There is a provision where irrecoverable debt can be written off at any time by the company....

A. The idea here is to reduce unnecessary litigation. Today if a company declares adebt as irrecoverable, IT department wants it proved. It cannot be proved. So what we propose is that if a business thinks some debt is irrecoverable, let it be written off in the books. But subsequently, if it is recovered, it will be treated as business income.

Q. What are the changes in depreciation ?

A. Sale of depreciated assets is now treated as business income because the expense is claimed under business income. Another significant corporate tax change is in depreciation on intangible assets. In a knowledge era, license fees, patents, franchises should be allowed to be amortised.

Q. Why should distributed dividends attract taxes ?

A. Today the revenue from tax on dividend is negligible because of exemptions under section 80M, 80L and 10(23) B and so on. The idea here is to increase revenue and also add an incentive for companies to re-invest in the business and issue bonus shares instead of dividend. So the proposal is to levy 10 per cent tax on dividend paid out and tax the same at 20 per cent for zero tax companies. We have proposed that MAT should be abolished.

Q. Why is agricultural income not taxed?

A. It is a state subject. Some states do levy taxes on plantations, like Tamil Nadu for instance. Revenues even with the current tax net can be substantially higher. For example, the total individual income tax collected in 1996-97 was Rs 18500 crore.

Assume only 50 million out of our population of 950 million pays tax at an average of Rs 10,000 p.a., we could raise revenue to Rs 50,000 crore.