Budget 2009
The budget 2009 is very special. It is from a new government which has a backing from parties which cannot dictate terms. It is coming at a time when the economy is having problems both from domestic and international scenario. The world is in financial turmoil and economies particularly advanced economies are struggling to put up a brave show to survive the crisis without adequate success despite resorting to conventional and un conventional measures. The expectations are very high from all sides and there are severe constraints to present a budget satisfying every one. Fiscal deficit is mounting and has surpassed the tolerance limit prescribed under the FRBM ACT because of liberal measures announced with all justification by the previous government to withstand the shocks arising from global economic crisis. General confidence level on the performance of the economy needs to be considerably improved and the general budget is only the way out for the same. This is going to be a major task for the new Finance Minister .Economy has to grow at least at 7% if not more to sustain the confidence level and the other macro economic conditions on an acceptable level.
Although FM has limited avenues to raise revenue for the present, but he has umpteen ways to raise resources for investments to raise revenues for the future. He has only to be innovative in his approach. Some of the areas where innovation is possible perhaps and some areas where a little bit of tinkering can be attempted are as under.
Real Estate Transactions:
This is an area where maximum black money is generated. Land mafias and black money thrive in real estate. Speculation as in capital market although well known and not desirable ethically has been the order of the day in land deals and it needs to be curbed in the interests of the society and the economy. Similarly purchases of flats and buildings taking advantages of tax incentives and interest rate concessions genuinely meant for providing shelter for those who do not have one are on the increase and create inequality in society, help generate black money, evade taxes, use scarce resources unjustifiably and straining government resources. More than the revenue loss to the government, the system in vogue to have the transactions is questionable and unethical. The deals in land and buildings need to be thoroughly reviewed and streamlined. The easiest way is to link the transactions and tie up with banks ,Registration authorities, Governments and Income Tax authorities through IT. This way, the strength of the Indian IT sector can be well encashed and an excellent data base with regard to land deals, money transfers, revenue collections for the Governments can be created with an eye on future policy formulation. A small percentage say 0.05% of high value real transactions taking place in any part of the country can go to Central Government Kitty under a special head which can be used for providing subsidy for poor people to acquire land.
FM can consider to have a fund opened exclusively to attract black money by paying 5% interest and offer some tax incentives on interest earned for two or three years .This tap can be kept open for a few years till Government get a feeling that substantial portion of black money has come to Government's kitty. The subscribers to this fund should also be linked separately to the data base created under land deals.
Transaction Tax:
The securities transaction Tax now in vogue needs to be reviewed and rationalized. In order to broad base the holding of shares among the retail investors and reduce the volatility in share market prices, transactions by individual shareholders should be exempt from this tax or the rates should be the bare minimum. The STT in respect of companies where share holding by retail investors are more than 50%, should be comparatively low. Such a measure will help to broad base the share holding pattern and bring down the frequent speculative nature of transactions. The objective of capital market inter-alia is to find resources and provide liquidity. STT should emerge as a tool to help capital formation, restrict volatility and speculation in the capital market. STT FOR RETAILERS AND INSTITUTIONS should also be at different rates. Instead of having a uniform rate of STT irrespective of the volume and value of transactions ,different rates linked to volume and value also can be thought of.
The concept of transactions tax can be gradually extended to other markets like commodities like gold, silver, currencies, real estates and futures market. In the long run STT should replace capital gains tax both short term and long term in respect of all transactions.STT is administratively convenient and devoid of any possible irregularities. Revenue earning potential is very high through STT.
Income Tax:
The present approach treating individuals and institutions alike for income tax needs a relook. Even among individuals, Tax rates for ordinary citizens earning only salaries and pensions and industrialists, businessmen earning in crores of rupees are the same. The inequity in the rates does not stand justice or reason. An individual earning a salary of Rs 15000 per month has to pay a tax @10% ,where as an individual who earns crores o f Rs as dividend need not pay any tax. An individual’s family budget gets seriously affected when even a Rs 100 is deducted towards tax, where as in the case of another individual having different sources of income is not affected even he is asked to pay a few Rs more towards tax. All are equal before law, but acceptance of law should stand justice, prudence, rationale and reason. Broader shoulders should carry heavier weight is the basic canon of income tax and this seems to have been ignored in our approach to income tax. There should be visible difference in income tax rates for individuals having only salary/pension as income and individuals having income from different sources. The potential to enhance the income and the capacity to spend should also be be the criterions in deciding the tax rates.
Institutions have to be brought under a separate treatment. Small cap, midcap and large cap companies have to be brought under different tax rates. Companies having larger share of retail investors with more than 50% capital holding should be given tax incentives. Companies earning beyond a cut off limit and having retail share holding pattern less than 50% of capital should attract comparatively higher rate of income tax. Regular payment of dividend, Percentage of retail share holding, transparency in accounting standards, corporate governance standards, compliance to regulatory requirements, standards of corporate social responsibility etc should attract tax incentives and also help to improve capital formation, develop healthy capital market and overall improvement of revenues based on principles of equity, justice, financial discipline and prudence.
Dr.T.V.G.krishnan
Although FM has limited avenues to raise revenue for the present, but he has umpteen ways to raise resources for investments to raise revenues for the future. He has only to be innovative in his approach. Some of the areas where innovation is possible perhaps and some areas where a little bit of tinkering can be attempted are as under.
Real Estate Transactions:
This is an area where maximum black money is generated. Land mafias and black money thrive in real estate. Speculation as in capital market although well known and not desirable ethically has been the order of the day in land deals and it needs to be curbed in the interests of the society and the economy. Similarly purchases of flats and buildings taking advantages of tax incentives and interest rate concessions genuinely meant for providing shelter for those who do not have one are on the increase and create inequality in society, help generate black money, evade taxes, use scarce resources unjustifiably and straining government resources. More than the revenue loss to the government, the system in vogue to have the transactions is questionable and unethical. The deals in land and buildings need to be thoroughly reviewed and streamlined. The easiest way is to link the transactions and tie up with banks ,Registration authorities, Governments and Income Tax authorities through IT. This way, the strength of the Indian IT sector can be well encashed and an excellent data base with regard to land deals, money transfers, revenue collections for the Governments can be created with an eye on future policy formulation. A small percentage say 0.05% of high value real transactions taking place in any part of the country can go to Central Government Kitty under a special head which can be used for providing subsidy for poor people to acquire land.
FM can consider to have a fund opened exclusively to attract black money by paying 5% interest and offer some tax incentives on interest earned for two or three years .This tap can be kept open for a few years till Government get a feeling that substantial portion of black money has come to Government's kitty. The subscribers to this fund should also be linked separately to the data base created under land deals.
Transaction Tax:
The securities transaction Tax now in vogue needs to be reviewed and rationalized. In order to broad base the holding of shares among the retail investors and reduce the volatility in share market prices, transactions by individual shareholders should be exempt from this tax or the rates should be the bare minimum. The STT in respect of companies where share holding by retail investors are more than 50%, should be comparatively low. Such a measure will help to broad base the share holding pattern and bring down the frequent speculative nature of transactions. The objective of capital market inter-alia is to find resources and provide liquidity. STT should emerge as a tool to help capital formation, restrict volatility and speculation in the capital market. STT FOR RETAILERS AND INSTITUTIONS should also be at different rates. Instead of having a uniform rate of STT irrespective of the volume and value of transactions ,different rates linked to volume and value also can be thought of.
The concept of transactions tax can be gradually extended to other markets like commodities like gold, silver, currencies, real estates and futures market. In the long run STT should replace capital gains tax both short term and long term in respect of all transactions.STT is administratively convenient and devoid of any possible irregularities. Revenue earning potential is very high through STT.
Income Tax:
The present approach treating individuals and institutions alike for income tax needs a relook. Even among individuals, Tax rates for ordinary citizens earning only salaries and pensions and industrialists, businessmen earning in crores of rupees are the same. The inequity in the rates does not stand justice or reason. An individual earning a salary of Rs 15000 per month has to pay a tax @10% ,where as an individual who earns crores o f Rs as dividend need not pay any tax. An individual’s family budget gets seriously affected when even a Rs 100 is deducted towards tax, where as in the case of another individual having different sources of income is not affected even he is asked to pay a few Rs more towards tax. All are equal before law, but acceptance of law should stand justice, prudence, rationale and reason. Broader shoulders should carry heavier weight is the basic canon of income tax and this seems to have been ignored in our approach to income tax. There should be visible difference in income tax rates for individuals having only salary/pension as income and individuals having income from different sources. The potential to enhance the income and the capacity to spend should also be be the criterions in deciding the tax rates.
Institutions have to be brought under a separate treatment. Small cap, midcap and large cap companies have to be brought under different tax rates. Companies having larger share of retail investors with more than 50% capital holding should be given tax incentives. Companies earning beyond a cut off limit and having retail share holding pattern less than 50% of capital should attract comparatively higher rate of income tax. Regular payment of dividend, Percentage of retail share holding, transparency in accounting standards, corporate governance standards, compliance to regulatory requirements, standards of corporate social responsibility etc should attract tax incentives and also help to improve capital formation, develop healthy capital market and overall improvement of revenues based on principles of equity, justice, financial discipline and prudence.
Dr.T.V.G.krishnan
