Bootstrapping ---- Laws/procedures to improve income tax collectiion
Proposed administrative procedure - TX.01
Procedures/Laws   to   improve   income   tax   tax   collection
- Income tax evasion in India
- A general overview of income tax evasion
- Providing tax-ID to EVERY person
- 0001. Registering tax-IDs on bank accounts
- 0002. Reporting interest reciever's tax-ID
- 0003. Obtaining asset statements of high net worth individuals
- 0004. Reporting tax-IDs of those who recieve payments from GoI bodies
- 0005. Reporting tax-IDs of payment-reciever
- 0006. Registration of tax-ID on shares/bonds
- 0007. Registration of tax-ID on flats/lands
- 0008. Electronic reporting of expenses/reciepts
- 0009. Electronic reporting of cash reciepts
- 0010. Increasing use bank checks
- 0011. Cash-usage tax for Police Forces
- 0012. Accounting for bad debt and unpaid expenses
- 0013. Gift Tax
- 0014. Taxes on agriculture income
- 0015. Abolishing HUFs
- 0016. Abolishing deductions and rebates
- 0017. Abolishing tax-exempt status of charities etc
- 0018. Reducing tax evasion via "ghost salaries"
- 0019. Flat income tax
- Improving administration of Income tax dept
- Draft of the act to create procedure TX.01
Income tax evasion in India
The evasion of income tax in India is rampant. What are the administrative solutions? How can evasion of income tax and capital gains tax in India be reduced to US/European/Japanese level or lesser, without creating any harassment on an honest tax-payer?
I do NOT see any one single remedy. I have proposed several small changes, each small change reduces the income and capital gains tax-evasion by a fraction, but togather they add up, and make tax evasion as less as it is in the West. At the same time, NO procedure I proposed increase hardship to ANY honest tax payer. Perticularly, not even one procedure I propose increase "search and seizure" powers of IT-officers, or even his power to send notices. Not even one procedure I propose increase discretionary powers of IT-officers. The burden of book-keeping DOES certainly increase, but it is something that can be easily automated, and will NOT create any problem to an honest tax-payer.
Most of my suggestions are copying the laws/procedures used in US and extending them.
A general overview of income tax evasion
I would broadly classify income tax evasion into two categories :
Single evasion is when X makes some payment to Y, Y does NOT show it as income and evades taxes. eg a person pays money to a small time street food vendor, the vendor does NOT report it and evades taxes.
- Single evasion
- Double evasion
In contrast, a situation is what I call as double tax evasion is as follows :
A common example is as follows : Say a person's gross reciepts from business is Rs 10000/-. Say he buys stationaries from a store and pays Rs 1000/-. In most cases, stationaries are deductible expenses, and so the buyer can deduct stationary expenses from gross reciepts and so needs to pay tax ONLY on Rs 9000/-. But the stationary seller destroys copy of the bill, and does NOT even show the sale of Rs 1000. This way, he evaded the tax that could have been due from his sale's profits.
- X makes payment to Y
- X manages to claim payment as expense and thus get deduction.
- Y DOES NOT show payment as its reciept and does NOT pay taxes, and income tax dept fails to even detect it, forget prosecuting Y.
From what I noticed, "single evasion" is rampant in US, UK etc and perhaps all over the world, though it is more rampant in India then in US etc. But in US, cases of "double evasion" are rare. While "double evasion" is also rampant in India. What is sad is that double evasion can be stopped trivially, but no MP or PM or Finance Minister in India ever took an iota of initiative to do so in past several decades.
The procedures I have listed will bring double tax evasion to near zero. In addition, they will also reduce instances of single evasion.
Providing tax-ID to EVERY person
What is universal ID system? A system where CENTRAL Govt has issued one and ONLY one ID to every person, every company, every firm, every bank, every bank account and as many peices of of property such as share, bond, land plots, flats etc. AFAIS, it is nearly impossible to reduce tax evasion in India to Western level without a universal ID system. And it would TRIVIALLY easy to bring tax evasion to western level once we have a enacted universal ID System. And it is TRIVIALLY easy to create a universal ID system for covering ALL entities such as individuals, companies, associations and major peices of property.
An ID system for individuals can be created using procedure ID.03. An ID-cum-ownership system for land/plots can be created by procedure ID.05. The Registrar of Companies already has a procedure to issue IDs to companies, which should be extended to cover partnerships. And the properitorships should be required to carry name and tax-ID of the owner. The banks have two flaws :- registration of tax-ID is NOT required to run a bank account and banks re-cycle bank account numbers and so there is no one-one relation. Once these two flaws are fixed, the bank accounts will have a universal ID. The shares/bonds have IDs and so do share accounts (so called deemat accounts) but again the system is incomeplete.
Preferably, ID should be 12-14 digit number, with digits only and no letters, and first digit should be non-zero. ID MUST not be recycled. I will show that by merely creating ID systems and improving them, tax-evasion in India can be reduced to as low as it is in west without increasing powers of IT-officers.
Proposal TX.01.0001 - Registrating tax-IDs in banks
Benefit of TX.01.0001 :
- After ID has been issued, the Income Tax dept should instruct all persons to register their tax-IDs on their bank accounts and bank deposits, and deposits in other agencies/firms such as post offices, private companies etc.
- The Income Tax dept should also instruct all banks/firms to freeze accounts and fixed deposits (including FDs) if the tax-ID of all of the the account owners are NOT registered by the account owners.
- The income tax dept should encourage banks to use the person's tax-ID as the account number itself, or person's tax-ID followed by a dot followed by a serial number. eg if tax-ID is as 289-567-7876, then account number can be 289-567-7876.0001 or so.
- The banks etc should be required to report to Income Tax Dept ONLY the tax-ID (not the amount, but only the tax-ID) of all individuals who have one or more deposits in the bank, and report amount ONLY if sum of balances/FDs is above Rs 10,00,000/-. If a person has accounts/FDs in more than 5 banks in India, then Income Tax Dept should ask each of the bank in which he has account to report balance/principal and other details to the Department.
It will unearth a large amount of black money over night. Many persons have kept their black money in form of FDs and postal deposits. When each deposit is tagged with the owner, and list is provided to IT-Dep, the IT-dept can do a search on those individuals, whose FDs are above incomes they reported in past several years. This will NOT give a proof, but a hint that deposit was purchased with black money. Also, the income tax dept can find out if the person had paid taxes on interest on the FDs had given in past years. If not, this itself will result into detection of evasion.
Proposal TX.01.0002 - Reporting interest reciever's tax-ID to Income Tax Dept
If a bank, post office savings or a private company gives interest on FDs or any account to any person, it MUST report the amount, date on which interest was paid, and the reciever's tax-ID to Income Tax Dept at the end of the quarter as well as end of the year.
Benefit of TX.01.0002 :
Say a person has 100 FDs of Rs 50,000/- totalling Rs 50 lakhs in 100 DIFFERENT banks at say 8% each. So interest is Rs 4000/yr per FD totalling Rs 400,000/-. Now the banks will NOT deduct taxes on this interest as TDS i.e. tax deduction at source in case of bank interest is ONLY when interest on FD is above Rs 5000/yr. So as of today the person can just evade all the taxes due on this interest income of Rs 400,000/- simply by NOT reporting this income !!!
And the situation in postal savings bank is truely hilarious. In case of postal savings, the administrative details are managed by Department of Posts. But it is the Finance Ministry which pays interests on postal savings. And the other department inside Finance Ministry, namely income tax dept, fails to collect taxes on that interest !!! So the right arm of Finance Ministry pays interest, and left arm of Finance Ministry doesnt even come to know about evasion ! Today, lakhs of individuals collect interest from post offices, and simply DO NOT show the interest income in their returns, and evade taxes.
The proposed procedure TX.01.0002 will stop this. Once each citizen has an ID, and once banks are required to register and report IDs of ALL interest recievers, such evasion will stop. Say the person's ID is #700897. Then each of the 100 banks will report that person #700897 has been paid an interest of say Rs 4000/-. Hence when person #700897 files return, and if he does NOT report the interest income of Rs 4000/- from each of this bank, the ITO can easily note that the person is under-reporting his interest incomes. Hence the person has NO option but to report his interest income of Rs 400,000/- and hence pay the taxes on it
Also, consider postal savings banks. Once each citizen has an ID, and ALL post offices register the ID on EVERY postal savings and every interest payments to Income Tax dept, the interest earners will NOT be able to evade the income tax due in the interest.
[Aside : The Income Tax code needs to be modified in case of FD interests. Say a person takes FD of Rs 100,000/- @10%/pa compounded annually for 3 years. Say he takes accumulation option. So the person gets interests as Rs 10000, Rs 11000 and Rs 12100 in 1st, 2nd and 3rd year respectively. But the person gets NO interest in his hands for 1st and 2nd year. But nevertheless, he is asked to pay income tax on this "income". Such "income tax" law is counter intuitive. There are valid reasons to keep it, but still it should be made optional. Basically, the person should have OPTION of specifying at the time of buying FD if he wants to pay tax every year or at the maturity. If the option is every year, the person should pay the tax every year. If the option is "tax at maturity", the bank should withheld X% of interest as TDS, and there should be no tax in the intermediate years. And the bank can charge interest as expense ONLY in the year it actually gives the interest. ]
Proposal TX.01.0003 - Asking ALL high net worth individuals to file Asset Statements
All individuals who meet ANY of the following criteria
should be required to file asset statement every year, whether a wealth tax is due or not.
- with gross income above Rs 10,00,000 in any of the past 3 years
- who have FDs above Rs 10,00,000 and are below 55 years
- who own more than 5 flats/plots/offices/shops
- who owns more than 2 cars
- who have travelled abroad more than thrice in past 3 years
- who are directors in ANY pvt or public limited company
- is a trustee of any trust with wealth above Rs 1 crore
- who are class-I/II govt employees
- sitting MLAs, MPs or Ministers
- sitting judges in court/tribunal
As time goes, the limit should be lowered, and eventually, almost everyone should be required to file an asset/wealth statement.
In addition, ALL companies (except propertorships) should be required to file asset statements. All trusts too should be required to file asset statements.
In the asset statement, the person MUST disclose the
Benefit of TX.01.0003 :
- cash holdings
- closing balances of all his accounts
- his own share in the bank account, in case account is shared
- FDs, and his share in FDs in case FD is shared
- plots/flats he owns, capital expenses he did in the flats
- his share in plot/flats he owns in case there are more than one owners,
- shares/bonds etc he owns and number of co-owners (in case of shares, EACH owner will be assumed as EQUAL owner)
- gold he personally owns
- and ALL the wealths of his HUF if any.
Today, if income tax dept discovers a pereson with asset above his combined income of past several years, and if the owner of assets claims that he had acquired the assets more than 7 years ago then the burden of proof lies on the head of income tax dept that the person had acquired assets in past 7 years. If the dept fails to prove this, the assets become regularized or white.
Hence what many evaders do is that they will purchase say land etc with income (on which they have NOT paid taxes) and keep it without disclosing for say 7-8 years. After 7-8 years, this property practically becomes white property. Or they will pass the incomes to someone else's names and get it transferred as gifts. And income tax dept cannot even know about them for years and years and years.
The proposal TX.01.0003 will reduce this. The person has to file asset statement in book value EVERY year. So any drastic rise in asset, unless accopanied with report of income (and thus income tax) will get easily noticed. This will reduce the evasion.
Proposal TX.01.0004 - Reporting IDs of those who recieve payments from GoI bodies
If any govt body gives any payment to any person as salary, contract payment or purchase of goods, the officer-in-charge MUST note the Tax-ID of the receiver, date and amount paid to that person and report it to the Income Tax dept in the quarterly/annual report.
Benefit of TX.01.0004 :
This will ensure that those who accept payment from govt bodies have to at least report it in their returns as receipts. Now if they are expenses, they too will need to take proper reciepts of the expenses, and this the other person will be forced to report it as his income. Since govt bodies are some of the biggest payment givers, this will force rank and file of companies to take reciepts for every payments they give, and hence other side will be forced to report the incomes (see also TX.01.0010 for details).
Proposal TX.01.0005 - Reporting IDs of payment-reciever
If a person wants to take a certain types of payments (specified below), as a deductible expense, he MUST note and report the ID of the payment reciever along with date and payment to the IT-dept at the time of filing quarterly/annual returns.
In addition, if a payment giver had kept a condition that payment reciever MUST report the payment as well as the ID of payment giver to the Income Tax dept, the payment receiver must do so in his quarterly/annual return.
Following are the items on which TX.01.0005 should apply :
Benefits of TX.01.0005 :
- TX.01.0005.01 - reporting tax-IDs of interest recievers : if a person wants to claim an interest payment as deduction, he MUST note and report the ID to the lender i.e. the interest reciever.
- TX.01.0005.02 - reporting tax-IDs of dividend recievers : A company which issues dividends MUST report IDs of dividend recievers.
- TX.01.0005.03 - reporting tax-IDs of salary reciever : A person which gives salary to employees must note and report the tax-ID of the employee, if he intends to take salary as a deduction.
- TX.01.0005.04 - reporting tax-ID of reciever of contractual payments : A person who gives amount to a private contractors must note and report the tax-ID of the contractor, if he intends to take payment as deduction.
Say a person is a self employed contractor. Say in a given year, he worked for 100 different clients, and obtained say Rs 4000 from each totalling Rs 400,000/-. Now those clients who DO NOT wish to report this expense as deduction may not ask for a reciept. Say 25 out of 100 clients do not ask for reciept, and pay by cash. But remaining 75 do ask for reciept and pay by cash or check or CC. Today, the person even after giving the reciept can simply NOT report the income and evade the taxes.
How does TX.01.0005.04 REDUCE this evasion? When the 75 persons who had taken reciepts file their returns, they will show a payment of Rs 4000 each to that contractor, with his ID. Now if the contractor DOES NOT report a revenue of at least Rs 300,000/-, the income tax dept's computers can easily show that he has under-reported his revenues.
- TX.01.0005.05 - reporting tax-Id of rent reciever
If a tenents pays rent, and wants part or whole of it as deduction, then as per procedure TX.01.0005.05, reporting tax-ID of landlord will become compulsory.
Today a large number of tenants pay a rent, and the landlord DO NOT report it on their tax return, and neatly evade taxes. With TX.01.0005.05, it would become TRIVIALLY easy for income tax dept to trace out such landlord. If a return of a person, whose tax-ID is say X, shows and entry that he paid a rent of say Rs 50000 to a landlord whose ID is Y, the IT-Dept's computer can check that person whose ID is Y does indeed show an entry that he recieved a rent income from person with ID=X of the amount stated. If Y does NOT report this income, the IT-dept can send a notice to X or Y or both and later investigate.
- TX.01.0005.06 - purchases Reporting Tax-ID of payment-reciever in case of ALL purchases (shown as expenses), except 2% of gross income. TX.01.0005.06 may look difficult, but I will later show how it is possible. As per this procedure, if a person with ID=X wants certain expenses as deductions, he must note and report payment recievers' tax-ID. Now how is it possible in ALL cases? eg Taxi drivers in India DO NOT provide a reciept. In such cases, the person will have to report ID as UNKNOWN. If sum of UNKNOWNS exceed certain amount, say 2% of gross revenues, scrutiny will become compulsory. Or else, scrutiny will be optional.
This will stop double evasion i.e. if a party is taking a deduction for a payment made to a counter-party, TX.01.0005 ensures that counter-party will certainly report it on his return as gross reciepts. This will reduce tax evasion.
Proposal TX.01.0006 - Registration of ID on shares/bonds etc
Benefits of TX.01.0006 :
- The income tax dept should ask all shareholders to register their tax-IDs with their companies or registrars of the companies.
- The income tax dept should ask all deemat account holders to register their tax-IDs with their deemat account providers.
- The IT-Dept should ask all companies to Deematize the shares, and stop the non-deematized shares' transfers after a certain date.
- For a given folio, if ALL owners' IDs are NOT registered, the income tax dept should instruct ALL companies and/or their registrars to freeze sale/transfer of ALL such shares. And the companies should also withhold the dividends.
- The income tax dept will also instruct ALL deemat providers to freeze the Deemat accounts and ALL the shares in them if tax-IDs are not registered.
The tax evasion on dividends will reduce. Also, the evasion of capital gains tax on sale of shares will reduce.
Proposal TX.01.0007 - Registration of tax-ID on ALL flats/lands
Benefits of TX.01.0007 :
- The IT-dept will obtain a list of ALL flats/plots from local municipalties along with the tax-ID of the owners. This will become easier after ID.05 is enacted. But even without ID.05, it is possible.
- The IT-Dept will instruct the state govts and municipalities to freeze the sale of land/plots till IDs of the owners of land/plots are registered, and owners have disclosed seller's name and address, purchase price and year in which they had purchased the plot/flat.
- The IT-dept will obtain a list of ALL flats/plots from local municipalties along with the tax-ID of the owners. For every plot/flat whose tax-ID of the owner is unknown, the IT-dept will send a notice to the owner to pay an additional tax of 0.5% of land value per quarter, till he registers the seller's name address and tax-ID and the date/year of purchase.
This will enable the IT-Dept to ensure that every person is correctly reporting his real estate wealth in his asset statement. In addition, it will also enable IT-dept to trace the those sellers who have evaded capital gains tax in past seven or fewer years. It will stop capital gains evasion henceforth, and would also improve collection of wealth tax.
Proposal TX.01.0008 - Electronic reporting of expenses/reciepts made by bank checks or CCs
One of the biggest headaches of an honest tax-payer is managing the reciepts. Why? If I plan to claim certain payment as an expense in this financial year or several years down the line, I need to keep the reciept of the payment. Some examples are as follows :
In short, keeping records of reciepts is a headache, and when some reciepts appear to be fishy, proving/disproving is bigger headache.
- Say a person buys stationaries for office use. This is a deductible expense. I can claim an expense deduction, but I need to keep the reciept for six-sever next years in case there is a scrutiny by IT-dept. Surely, this a headache.
- Say a person purchases new tiles for his personal house. This is NOT a deductible expense as such, as this is his PERSONAL house. But say 10 years later he sells the house. Then he can add the cost of tiles to house cost and claim a larger reduction in capital gains. But he may need to preserve the reciept for 10 years !!! And in case the payments are challanged, the IT-dept has NO easy way to disprove it and the person has no easy way to prove it. And hence the confusion prevails.
- In many cases, a party legitimately makes a payment to the counter party. And say the counter party becomes untraceable. In such case, the burden of proving, that payment had indeed actually occured, may fall on the head of the payer. In such case, the payer's hardships increases.
- What is equally scary is following : say a person made a payment of Rs 50,000/- for his offices for his phones. It is possible that IT-dep would ask him to "justify" that expeneses were necessary for his conducting his business, after several years. The limitation today is 6 years, and it needs to be reduced to 3 years and may be 1 year in certain cases.
And TX.01.0005.06 worsens this problem. TX.01.0005.06 will require every person who plans to take an expense as deduction this year or any number of years down the line will need to report reciever's tax-ID in the next quarterly/annual return. A typical business may be making 100s of such purchase. How can the task of prepariing a timely report be made less difficult? How can it be made less error-prone? And how can we ensure that if errors happen, they will get detected ASAP?
The procedure TX.01.0008 makes record keeping simple for payments made by check, and TX.01.0009 does same for payments made by cash.
Following is the description of TX.01.0008
Benefits of TX.01.0008 :
- Introducing checks with Tax-ID : A check writer may optionally specify the tax-ID of money reciever along with his name in the check. In such case, the bank can deposit the check in the money-reciever's account ONLY if the tax-ID on the account is same as the one on the check. This is what I would call as "ID stamped check".
- The Income Tax Dept will allow every person to have an electronic account at its central server (which may be distributed at physical level).
- Now say a PersonX has account in BankX and PersonY has account in BankY. When PersonX writes an ID-stamped check to PersonY, and AFTER the check is cleared by BankY, the BankY will put a note in PersonX's account in IT-Dep's server of check paid, and a note in PersonY's account of check cleared.
- In case the payment is made by credit card and not the check, the task of generating payment notes in income tax's server will be done by credit card companies.
- Both, PersonX and PersonY will be able to put comment lines on payments he has has recieved/given. The comments may consist of description of the goods/services bought/sold. Optionally, they may also put a scanned image. The comments will be visible to payer, reciever and IT-Dept's officers only.
- The IT-Dep can challange the payment and its justification as valid expense for upto 3 annual returns filed after the expense note was created. After 3 annual returns, they cannot challange the payment nor its justification.
- The payer/reciever will be also able to mark any one of the several codes specified by the income tax dept to the payment he has made/recieved.
It reduces the payment issuer's responsibility to ensure that the reciept is not forged. It also makes easy for IT-depts officer-in-charge to ensure that reciept is NOT forged. And the payment had indeed actyually occured. And this will make honest tax-payers give payments by check as far as possible.
Proposal TX.01.0009 - Electronic reporting of cash reciepts
The procedure TX.01.0008 reduces the payer's (as well as reciever's burden) in managing records, when payments are made by bank checks, DDs or CCs. Here the intermediate agencies generate electronic confirmation. But what is the payments are made cash? In such case, TX.01.0009 PARTIALLY solves the problem.
Benefits of TX.01.0009 :
- A person may optionally register himself as "electronic confirmation provider". The following clauses of TX.01.0009 apply ONLY to those persons who have voluntarilty registered himself as "electronic confirmation provider".
- If a person is registered as "electronic confirmation provider", and he obtains payments by cash, he must enter "cash payment recieved" confirmation into his computer account in income tax dept within 15 days, along with reciept#, date and amount.
- If the cash giver had provided his tax-ID (which the payer MUST do if the payer wants to use the payment as deductible expense) then cash receiever must also post cash-giver's tax-ID in the note.
- What if a person is NOT computer literate? He has two options : he NEED NOT register himself as "electronic confirmation provider" or he may outsource the service to someone else.
- In case a person is registered as "electronic confirmation provider", a person who gives cash to such person can claim a deduction ONLY if a note is created in IT Dept's computer confirming this payment.
- In case a payer has paid cash, and the reciever is registered as "electronic confirmation provider", but a payment note DOES NOT appear in the cash-payer's electronic account in Income Tax Dept's server, the payer CANNOT take the payment as an expense.
- The payer may file a complaint against the reciever before Income Tax Dept. The local tax officer will decide if the payment was actually given or the reciept is forged within 30 days after filing the complaint. Eighter party may appeal before a Jury, whose decision will be final.
- Gradually, the procedure TX.01.0009 can be extended to so that every shop, whose real estate value is large than certain value will get certain deductions if it starts providing electronic confirmation. Gradually, everyone except street vendors should be included in the net. Or, it may be made compulsory without any incetive for large shops, resturants etc
- Later, TX.01.0009 can be extended to as "any cash payment can be made a deductible item ONLY if the cash giver has a reciept which has cash taker's tax-ID". In such case, more and more persons would insist on electronic confirmation, and more and more persons would start providing the same.
It will reduce the instances of double tax evasion. And TX.01.0009 PARTIALLY solves the problem of maintaining/verifying the reciepts. In addition, persons would start switching to giving payments by CC, check and DDs. The improvements in wired as well as wireless telecommunication (see procedures
COMM.04 for details on wired communication and < a href = "eas04.htm" , target = _blank> for improving wireless communication), cost of CC/check will reduce. So more and more persons will find it cost-effective to give/take payments by CC/checks.
Proposal TX.01.0010 - Increasing use bank checks
One reason why business in US find it much more difficult to evade taxes, is that is difficult to under-report revenue. Why? Becuase a large number of customers pay by check or credit/debit card. In case of such payments, the banks and CC-companies become a true impartial and relaible "witnesses", which are easily accessible to taxmen. Hence the payment reciever has no option but to report all its revenues.
IOW, widespread use of checks/CCs reduce tax evasion.
But why are checks/CCs so sparingly used in India? Following are key reaons
Procedure TX.01.0010 : A following type of check may improve the use of checks and thus increase accountability in commerce and thus reduce tax evasion :
A bank can issue a special type of check, called self-expiring checks, which will have the name, address, the tax-ID and the date on which the check book was issued. This will be PRINTED. The bank, upon the request of account holder, may also print "below Rs X" note. These checks will be considered expired six months after they are printed, used or unused.
- The worst problem is that when a check bounces, the courts take over 4 years to punish the culprit, assuming accused does NOT file an appeal. Solution? Use Jury System for check bounce cases so that verdicts are fast. Please click here for details on Jury System in Lower Courts.
- Even though laws related to check bounce are quite tough, the burden of serving notice, summons and warrants lie on complainer. In many cases, if the accused may be untraceable, in which case serving him summons also becomes difficult. The police/courts MUST assume the responsibility of brining the accused before the court. Solution? We need to improve summon sending system. How? Please see procedure RN.12 for details.
- CCs charge 2% to 4% surcharge. This is too high in may cases. Solition? Improve telecommunication so that cost redcues. How? Please see COMM.01 ,
COMM.04 for details.
- Recently, a court declared that if a person gives a bank check on a ceratin day, but he had closed his account BEFORE THAT date (on which he had given the check), the law related to check bounce (so called section-138 of Negotiable Instrument Act) will NOT apply. The regular law of defrauding (IPC section 420 etc) may apply. But it is difficult to prove conviction under regular fraud cases, as in such case, the accused can say that there was no payment due, and the burden of proving that a payment was due lies on check reciever. IOW, the check reciever is at disadvantage. This has further reduced the use of bank checks. Solution? The procedure TX.01.0010 will partly solve the problem.
A person who has opened such an account CANNOT close the account for 8 months after he had last issued a check book.
If a check issued by such a person bounces, and if same check is presented again, and it bounces again, the check-owner would ONLY need to present the check before the court. The court shall write the notice to the check-writer at the address specified on the check. It would be responsibility of court/police to arrest him subsequently.
If the person is NOT traced for 2 months, the court will instruct ALL banks in India to freeze the bank accounts if the account has that specific tax-ID. This can be implemented by courts sending a note to RBI's main office in Mumbai, and then RBI sending memo to ALL banks.
If and when the accused is traced, the Jurors will decide the case.
Benefits of TX.01.0010 :
The sellers will be willing to put more and more faith in checks, and checks will gain acceptance. When certain sellers start using checks, other sellers too will be pressurized to accept checks, or else buyers may flee to them. In such cases, checks will gain wider and wider acceptance. And the increase in payments by cheks will reduce tax-evasion.
Proposal TX.01.0011 : Cash-usage tax for Police Forces
Benefits of TX.01.0011 :
- The banks should be allowed to issue DD only against a check and NOT a cash. The DD should have tax-ID of the account from which the draft was issued.
- If a person withdraws/deposits cash above Rs 10000/- per month, the bank MUST charge him say 1% of the deposits/withdrawal and send this collection to IT-dept as cash-usuage charge.
- In addition, if the cash deposits are above Rs 100,000/- in any 7-day period, the banks should be required to report the tax-ID to the income tax dept.
- The banks will report to income tax dept the sum of ALL cash withdrawals and deposits of a person (along with his tax-ID) every month along with the cash-usage tax paid for that month. The income tax dept will add the cash withdrawal and deposits each month from all the banks and deduct Rs 10,000/- from it, and then compute 1% of it and subtract the cash-usuage tax collected by the different banks in that month from that person. The income tax dept will charge twice the amount as cash-usuage tax.
- If any person/company has given/accepted a payment of above Rs 100,000 by cash in a given financial year, the IT-dept should charge a 1% cash-usage charge for amount above Rs 100,000 in that year.
- The tax amount collected will be passed to the State Govts. The money from this tax will be used strictly for police services only.
This will reduce the use of cash, and increase use of checks/CC/DD and thus redcue tax evasion. Also, there is a morally valid reason to charge cash transactions - they increase possibility of theft and thus increase the work load on police. So it is perfectly ethical to put a small charge on cash transactions to fund the police staff.
Proposal TX.01.0012 : Accounting for bad debt and unpaid expenses
- If payment is NOT recieved within 3 months, the person should be allowed to take the payment off the income from the final return (NOT the quarterly returns).
- Removing an expense : If payment is NOT made within 3 months, the person MUST be required to take expense off his books for the current year in the final return (NOT the quarterly returns).
Proposal TX.01.0013 : Gift Tax to fund Military
Benefits of TX.01.0013 :
- Gift tax for Military : All gifts, except gifts from close relatives should be taxed (close relatives would mean spouse, sibblings, parents, children ONLY and not even in-laws).
- The gift reciever must report gifts in excess of say Rs 20000/- in a year, except gifts received from close relatives, and bracket it as income, and pay tax on it.
- The gift tax will be equal to highest marginal tax rate. The money from gift taxes will be used strictly for defense.
Will increase funds for military.
Proposal TX.01.0014 : Taxes on income from agriculture
Benefits of TX.01.0014 :
- If a farmer has only agricultural income, and net income from agriculture is below Rs 100000/yr, there will be no tax. The income above that will be taxed at normal rate. If he has non-agricultural income of Rs X, the exemption on agricultural income will be only (Rs 100000 - Rs X).
- For the purpose of deduction of farm expenses such as electricity, labor, fertilizer etc, if the farmer has more than 50 acres and/or total (total, not just agricultural) income of any of the past 5 years is above say Rs 200,000/yr, he MUST maintain the books. If the land holding is below 50 acres and his income of all the past 5 years is below Rs 200,000/yr, he has two options:
- he may maintain books OR
- take x% deduction from his total sales of farm output as expense where x will be the amount decided by the Income Tax Dept and Argricultural Ministry. OR
- may deduct Rs X per acre of land he owns as expenses, where X will be the amount decided by the Income Tax Dept and Argricultural Ministry, and may be based on the crop he sells. If the farmer takes this option, he must disclose the plot numbers and sizes of the plots he used for agriculture. And if a plot has more than one owner, he must disclose his %-ownership of the plot, and can take ONLY proportionate amount of Rs X as deduction. eg say IT-dept allows to deduct Rs 20,000/acre as expenses from gross reciepts. And the farmer has 40% share on the plot of 50 acre. Then he can deduct Rs 20000 * 50 * 40/100 = Rs 20000 * 5 * 4 = Rs 400,000 as total expenses from the gross reciepts.
- The money from taxes from agricultural income will be used strictly for defense.
Will increase funds for military.
Proposal TX.01.0015 : Abolishing HUFs
Benefits of TX.01.0015 :
- All properties owned by HUFs should be bracketed with properties of "karta" of HUFs.
- The Income Tax dept will ask the banks to close ALL bank accounts/FDs in the name of HUFs, and would ask the banks to return the funds to the karta of HUF using payee-ac checks.
- The Income Tax dept will ask state govts to freeze ALL lands/flats in the name of HUFs, till HUF's karta transfers them in the name of himself. The wealth tax will be twice till the karta transfer this property.
- The Income Tax dept will ask ALL companies and its registrars, to freeze ALL shares and withhold dividends in the name of HUFs, till HUF's karta transfers them in the name of himself. The DPs will be asked to freeze all shares in HUF accounts till HUF's karta transfers account in his name.
- Likewise, ALL loans given to or taken from HUFs will be become liability or property of the HUF's karta.
- The Income Tax dept will void ALL tax-IDs issued to HUFs.
Thus incomes of HUF will become income of karta, and thus income tax collection will increase.
Proposal TX.01.0016 : Abolishing deductions and rebates
All deductions, except those necessary to run businesses, should be abolished. In short,
Benefits of TX.01.0016 :
- no rebate/deductions for donating to charities
- no rebate/deductions for any kind investments including retirement investment including provident funds and private provident funds
- no rebate/deductions against education fees
- no rebate/deductions on buying houses
- no rebate/deductions on interest payments on personal loans, car loands, house loans, education loans etc
- no rebate/deductions for being a women (rebate for senior citizens may continue)
- no rebate/deductions on incomes from salaries (i.e. so called standard deductions should be cancelled).
- no deductions/rebate on incomes from dividend or interest incomes from banks or LIC etc.
- No deductions for incomes from exports
- No deduction/rebate from income from software export
Rebates and deduction only increase relative net taxes on lower income group. eg Consider Rs 5000/- rebate to females. Obvuously, a women who is earning Rs 40000/yr will get ZERO benefit of this, while maximum benefit goes to someone earning say Rs 90000/-. IOW, reducing tax rate and cancelling rebated deduction give LARGER benefit to those in lower income groups.
Besides, rebates and deductions divert investments to less efficient areas from more efficient areas. eg say a person gives loan of Rs 100,000 to a another private person who is willing to pay interest of 15% i.e. Rs 15000/yr. And say highest bank interest is 12% i.e. Rs 12000/yr. Then also person will give money to bank. Why? Becuase bank interest of upto Rs 12000 is tax free. So when bank gives Rs 12000 of interest, the tax due is zero, while in first case the person will have to pay tax on ALL Rs 15000. Such rules prompt a person to make LESS efficient choices.
Also, the way things work, the finance ministry's officers/ministers just extract bribes when in comes to creating categories for deduction/rebates. eg CEOs of some top companies gave HUGE bribes to Finance Ministers, their officers and PM in year 2003, and we saw a strange law -- if a person invests in shares of some top 500 companies (called A scrips), the long term capital gains tax was ZERO. But capital gains tax was applicable in OTHER companies' shares and also applicable in case of GoI bonds !!! Such selective deductions, rebates or ANY other type of exemptions ONLY increase corruption and erode efficiency.
So SAY NO to all deductions, rebates and selective exemptions.
Proposal TX.01.0017 : Abolishing tax-exempt status of ALL charities, temples, educational trusts, health trusts etc
Benefits of TX.01.0017 :
- The charities should be required to pay taxes on ALL its incomes such as incomes on interests, income from its businesses etc. just like regular companies.
- If the charity has recieved donations by check from an entity in India, it must report it to IT-dept with the tax-ID and account number of the donor.
- if the donation giver was in highest marginal tax rate bracket in the previous year, then the charity will need to pay NO tax.
- In case donor was in a lower tax rate bracket, the charity will need to pay the difference as tax. eg say donor was in 20% gift bracket when highest tax rate is 30%. Now if the donor gives a donation of Rs 100,000/-, the charity will need to pay a tax of 10% on THAT donation i.e. Rs 10000/-.
- In ANY case, the donation giver will get NO deduction in his taxes from this donation.
- If the charity has recieved donation by cash, or by DD/check from an unknown source or if the donor's previous year's marginal tax bracket was unknown or donation (or transfer payment) was from a foreign country including UN or charity registerd in a foreign country, the charitable institution MUST pay highest marginal tax rate on the donation as tax within 90 days after it recieves the donation.
- There will be no tax on money transferred from one charity to another as long as both are in India.
- the money recieved from this tax will be used strictly for defense and nothing else.
Military will have more funds. And tax evasion in the name of charities will reduce.
Proposal TX.01.0018 : Reducing "tax evasion via ghost salaries"
What is tax evasion via ghost salaries?
Consider existing (Apr-2004) tax laws/rates in India. Consider following scenario
Welcome to the world of GHOST SALARIES.
- As of Apr-2004, in India, income tax due on a man with salary income below Rs 75000/yr i.e. Rs 6300/mo is zero. And on a woman with salary income below Rs 120000/yr i.e. Rs 10000/mo is zero.
- Now say the employer is ACTUALLY paying his employee Rs 2500/mo i.e. Rs 30000/yr.
- Say employer's net income after ALL deductions including salary is Rs 400,000/yr i.e he is in highest marginal tax i.e. 30% bracket.
- Now how can employer reduce his taxes without reducing income?
How is ghost slary implemented
Now why would employee also agree to report such WRONG ghost salary? There are three reasons
- The employer can pay the employee a salary of Rs 6000/mo and then ask the employee to repay Rs 3500/- back. Or just pay the employee Rs 2500/- and ask him to sign on a voucher that "salary of Rs 6000/- has been paid."
- IOW, official salary stated in income tax return would be Rs 6000/mo, of which Rs 2500/mo is REAL and Rs 3500/mo is GHOST salary.
- < So employer's "official" income will reduce by Rs 3500/mo i.e. Rs 42000/yr. And the employer evades a tax of 30% * Rs 42000 = Rs 12600/yr.
- If the employee is female, the employer can even officially state the salary as say Rs 10000/mo i.e. about Rs 120,000/yr on paper, while in reality it may be just Rs 30000/yr. And thus employer can "save", rather evade, taxes of about 30% of Rs 90000 = Rs 30000.
- So Rs 12000 to Rs 3000 of evasion is per employee is possible/ Most employees will NOT go that far, they will evade say Rs 5000 to Rs 10000 per employees. But this is per employee. An employer with 5-10 employees can easily evade similar amounts for every employee.
Here is another way businessmen use ghost salaries to evade taxes
- Employee has nothing to lose : The taxes due on employer are zero whether salary is shown as Rs 30000/- or shown as Rs 75000/- (or Rs 120000/- in case of females). So the employee has NO real reason to refuse employer's demand to show an additional ghost salary.
- Fear of getting fired : These days, unemployment runs so high that employees have no option but to treat employers like God, and it is impossible to turn down such zero cost requests.
- In addition, the employee too has one advantage --- by showing inflated ghost salary incomes, he qualifies for a larger bank loans. In India, where interests on loans from private street lenders are 3% to 5% to 7% per MONTH i.e. 36% to 80% per YEAR, while bank loans are 8% to 12% per year, the salary earners are always eager to get bank loans for house, furniture, personal expenses etc. Now maximum amount a bank will loan will depend on income reported in past 3 years income tax return -- higher the ghost salaries -- more the low interest loans banks would give and thus lesser the loans they will need to take from loan sharks --- lesser their TOTAL income burden. So sometimes, you see employees requesting employers to over-report salaries !!
- Say there are two businessmen A and B.
- Both have earned say Rs 300,000/- in their business incomes, and say their wives' actual incomes are nil.
- Then A will report a ghost salary paid of Rs 120,000/- to B's wife, so tax liability of B's wife will still be zero, while A's tax liability will reduce by 30% * 120000 = Rs 36000/-.
- Then B will report a ghost salary paid of Rs 120,000/- to A's wife, so tax liability of A's wife will still be zero, while B's tax liability will reduce by 30% * 120000 = Rs 36000/-.
TX.01.0018 : Collecting refundable excess tax can partly reduce the problem.
How do the above procedures reduce ghost salaries? If an employer wishes to over-report salary, he will still need to pay the highest marginal tax rate. And the refund will go to the employee, and when employee gets the excess tax back, there is no guarantee that employee will return the money back to the employer. So the employer is unlikely to enter into such deal
- The salary returns should be filed every quarter
- If the annual salary of a person is above Rs 24000/yr, the payment over Rs 24000/- MUST be by payee-ac checks ONLY. As time passes, the limit should be further reduced. The employer pays a salary of above Rs 24000/- in a month, he will need to pay a charge of 20% of the salary above Rs 24000 paid.
- Salary expenses MUST be expensed on CASH basis, i.e. the employer can take the expense ONLY when the check was deducted from his account, NOT when the check was given.
- The tax on salary above Rs 2500/mo or Rs 30000/yr should be deducted at highest marginal tax rate, and the difference will be repaid to the wage-earner a certain number of years, along with PLR interest.
- say marginal tax rate is 30%
- if salary of a person is Rs 2500/mo i.e. Rs 30000/yr, the tax deducted will be zero.
- if salary is Rs 4000/mo, then on salary above Rs 2500 i.e. Rs 1500 the tax rate will be 30% i.e. tax of Rs 2500 * 30% = Rs 750 will be deducted by the employer and deposited with IT Tax dept same quarter. The employee will get Rs 4000 - Rs 750 = Rs 3250
- The employee will get this amount back after certain number of year, along with PLR returns.
Benefits of TX.01.0018 :
The reduces tax evasion by ghost salary.
Proposal TX.01.0019 : Flat income tax
Both, the progressive and regressive taxes are unethical.
If any activity's cost is to be borne by the society, it is MUST that everyone bears the cost in the SAME proportion to their incomes. There is NO ethics in saying that he who earns more should pay higher taxes. If not flat, I would propose following tax rate based as of 2004 level
Income below 50000 : 0%
Income between 50001 and 10,00,000 : 10%
Income above 10,00,000 : 20%
Such flat taxes will reduce tax evasion by ghost salaries.
In US, if one takes employee as well as employer side social security tax into account, income tax is a flat tax. Which is why one would never see ghost salaries in US.
Benefits of TX.01.0019 :
Flat taxes reduce evasion, and if coupled with wealth tax, there is NO decrease in total tax collection. In fact, the tax collection will increase. Also, flat tax may increase income/wealth inequality, but it DOES not increase poverty.
Improving administration of Income tax dept
Following procedures will improve internal functioning of Income Tax dept
- The PM should appoint Finance Minister, who should appoint Income Tax Dept's Chairman (which is the case today).
- The citizens should have powers to replace IT Chairman by RLPP. What is RLPP? It is fast/inexpensive procedures
Proposal TX.01.0020 : Compulsory payments by checks
Income tax dept should ask certain companies to take certain payments strictly by tax-ID stamped check/CCs, and report the reciept from each tax-ID.
Some examples can be :
- electricity bill
- phone bills
- insuarnce policy payments
and so forth
This will ensure that a person can spend only the money on which he had paid income tax.
Draft of the act to create procedure TX.01
There is NO one single draft to enact TX.01.
I have proposed 3 drafts to enacts some parts of TX.01.
Please click here to see the drafts.
- To bring RLPP/Jury over employees of Income Tax dept and to bring Jury System in Income Tax trials, the citizens would need to pass a law in the Parliament.
- To create ID-based reporting of expenses, the Parliament first needs to pass a draft that would ensure that every person indeed has an ID. Please click here for the description of ID system. Once ID system is enacted, the citizens need to pass a draft that would make reporting of ID compulsory.
- To implement other proposals related to improving collection of income/capital gains taxes, a draft for each is needed in the Parliament.
Now citizens can ask MPs to pass this Act. But IMO, it will be wiser for citizens to first enact procedure LM.03, and then use LM.03 to pass these drafts WITHOUT any help from MPs. To know about procedure LM.03, please click here .
If you have any other question, please mail it to MehtaRahulC@yahoo.com. Thousand thanks in advance.
Next - TX.02 : Procedures to improve capital gains tax