The Finance Minister - The Taxman shall not sleep.....

On 27.10.2005, Mr. Chidambaram, the Finance Minister, while advising tax payers to file their Income Tax Returns in time, indicated that salaried class might be spared from filing tax returns from next year provided there was no income from any other source. “We are considering the proposal” he said, adding that it depended upon how soon the tax department put in place the fully on line tax information network.

At first glance, the proposal should make the salaried class jump with joy for the small mercy that the ever-so-considerate Finance Minister proposes to shower on the honest salaried tax payer, whose tax is deducted already before he can lay hands on the fruit of his sweat and toil.

Looking beneath the surface, however, it appears that the proposal may not be so exciting as it sounds and further, there are other important issues involved.

There are two categories of salaried class from a tax point of view. First, those who do not have to pay tax in any case, considering their salary earnings after the usual salary related exemptions. There is no need in any case for persons in this category to file returns. The second category is of salaried persons whose salary income falls above the threshold and who are liable to deduction of Income Tax on their salary income. The tax on their salary income is already deducted by the employers in the first instance. Assuming that salary is the only source of income, this is the category that should benefit from the proposed dispensation from filing tax returns.

The real catch lies in the caveat: ‘provided there is no income from any other source’. Knowing that in our country there is a high propensity to save from the income, most salaried persons, even many in the non-tax paying category, are surely likely to have savings and investments to a greater or smaller extent. If a salaried person has any income from such savings, it could effectively exclude the person from the dispensation and make it necessary for the person to file a return. Tax Returns may also be required to secure any exemptions that may be available. The uncertainties related to determination of income due to the introduction of the FBT this year also add another dimension that might render the dispensation ineffective in practice.

It remains to be seen to what extent the proposal would be of benefit in real terms. On the other hand, it also begs the question whether the administrative burden on the tax machinery for monitoring would reduce or even increase.

Of more concern than the discomfort of filing the tax returns, are certain other issues related to Income Tax, that arise out of the Ministry’s proposed on-line tax information network. This network is supposed to enable the Tax Department to collect information related to an individual’s financial transactions. The main issues of relevance are:

Compromising a citizen’s right to privacy

The Government is taking increasing recourse to various service providers and agencies dealing with the citizens to collect information about them, ostensibly to assist in identifying tax evaders. Apart from employers, banks, credit card aganecies and other service providers like telephone companies, are also obliged to provide details of individuals’ transactions to the Tax Department. It means that a third party is being asked by the Government machinery to provide certain information about a citizen without the citizen’s express consent, without him being aware of what information is being provided and without him having an opportunity to prevent it being passed on. The right to privacy is a fundamental issue and that right is certainly being compromised to the extent that such information is being provided to a third party – even if that third party happens to be a Department of the Government – without the consent of the individual concerned.

To be sure, the Government will certainly advance a justification for this invasion of privacy but once such transgressions are allowed or overlooked, there is nothing to prevent an overenthusiastic administration from extending the principle further. The question of possible misuse, howsoever remote, of such information also needs to be kept in mind, even if the Finance Minister reportedly stated that the data remains accessible only to the CBDT.

The Tax Payer

The Cost of Compliance

The massive amount of data that have to be provided on a continuous basis to the Tax Department, certainly places an undue administrative and cost burden on the part of those who are supposed to comply with these requirements, with further consequences for not complying with the same.

There is nothing to prevent the Government from adding to these requirements for the purposes of facilitating its own work. If the requirements are confined to one tax today, they can, and in all likelihood will, be extended to other types of taxes as well.

These two significant issues are likely to result in citizens and others being affected approaching the judiciary for redress sooner or later.

At some point of time in the past, it was claimed that the Government was moving towards a trust-based tax system. How far such tall claims were justified in the light of events thereafter, is a question that needs to be answered. After all, the Finance Minister has just proclaimed grandly: "We have more information than what people think..”

Administrative machinery for using the data

Continuous generation of such massive amounts of data from the entire country will inevitably result in the need for a huge and permanent commitment of resources in terms of personnel and infrastructure, even if such data is processed electronically. After a period of time, the Department may well be so overwhelmed with the data as to make it difficult to make sensible use of the data except in a random manner. It would be reasonable to ask the Ministry whether such huge expenditure on the part of the Government as well as those who have to provide the data can be justified and the estimated benefits in monetary terms.

All in all, the actions taken by the Ministry in the recent past with regard to simplification of Income Tax do not appear to support the Finance Minister’s contention some time back that whatever was necessary has already been done. If anything, the introduction of FBT and the Tughlaqi idea of the tax on cash withdrawals tend to make the Tax rules more complex.

It is time for the Ministry to focus on further reviewing the concepts, structure and rules of the Income Tax and also try to do away with concepts and rules, which may not be relevant in today’s situation or may not be yielding significant results.