The finance ministry will soon unveil a new format for income-tax returns that will hopefully make tax filing easier for the salaried and pensioners. Theoretically, redesigning a returns form should not be as complex as, say, rewriting archaic income-tax laws. Taxmen have, however, been grappling with the new format for over six months as the challenge is to make it really simple.
The quest for a simple I-T return form began over a decade ago. Former finance minister Yashwant Sinha launched this initiative after one of his trips to the US where he got a chance to look at their most widely-used return form, 1040 EZ, and was impressed with its user-friendly design. On his return, he nudged taxmen to work on Saral in the hope that an EZ, or easy, return form would foster voluntary compliance.
His successor P Chidambaram replaced Saral with Form 2F for assessment year 2006-07, and it was similar to a company’s balance sheet. Taxpayers resisted when they were asked to furnish a cash-flow statement detailing every transaction in the financial year. Next year, the cash-flow statement was dropped and a series of I-T return forms (ITRs) were designed for taxpayers with multiple sources of income. The brief was to make forms user-friendly for all taxpayers.
Saral II will replace ITRs in assessment year 2010-11. Finance minister Pranab Mukherjee too believes that return forms should be simple. With the permanent account number (PAN) now mandatory, and in a world of computerised transactions, there is scope to make tax filing less cumbersome and tedious.
The language can be simple as taxpayers across the country find I-T laws, rules and, to some extent, even return forms a word-maze to tests their comprehension skills. The instructions for tax-filers should also be easy to follow.
Changes are, however, needed at a fundamental level as our tax laws are still complex and subject to different interpretations. Dhirendra Kumar, CEO of Value Research, says that it is ironical to have a third version of Saral when tax laws continue to be complex and ambiguous. They simply don’t work together.
The direct taxes code promises to remove ambiguity in tax laws and provide stability to the tax regime. Return forms will have to be redesigned when the code comes into force because it will change the way taxpayers compute their income and tax outgo.
This fiscal year, the burden on personal income tax payers has been lightened, with a widening of the tax slabs to reward the missing middle for better compliance. Would Saral II, along with a lower tax liability, improve tax compliance among individuals?
Barring the slowdown in the last two years, direct tax revenues surged with economic growth. Direct tax collections contribute more than half of total tax revenues today compared to just 14% in 1990-91. The taxpayer base saw a spurt in the late 1990s with the introduction of one-by-six scheme that induced scores of people to file tax returns. But this effort yielded small amounts of tax — too small to justify the administrative costs. The base shrank when the scheme was dropped and has since remained stagnant.
Today, there are over 3.3 crore taxpayers in the country. The proportion of high net worth individuals (HNIs) in the taxpayer base is, however,minuscule. That the big fish continue to swim safely outside the tax net is not acceptable.
The tax administration is now well-equipped to go after them, with the tax information network that gathers information on large financial transactions. A foolproof PAN is needed to match data from multiple sources with the information furnished by the taxpayer in his return.
The tax department should, therefore, focus on making it easy for individuals to get a PAN. It would also make sense to target a smaller number of HNIs than fritter away administrative energies on many tax returns yielding small amounts of tax. What matters is the amount of tax collected, not the number.
Ideally, salaried taxpayers should be spared of providing a mine of information in their returns. The physical interface between tax authorities and assessees should also be minimal. This will happen when the centralised processing centres are equipped to handle all returns. Information can always be sought if a return is picked up for scrutiny through the computer-aided system.
There is also a pressing need to implement more reforms in direct taxes: end exemptions and lower tax rates. The taxpayer is the engine of the economy, and the mantra for success of tax reforms is simple laws and rules. Designing a truly saral (simple) form will then be aasaan (easy).