Revise India’s income tax rules for simplicity as proposed but don’t let evasion get easier

While this facility is not new, the categories of taxpayers who can avail of it would widen, although they might need to spend some time on amending the pre-filled data, given the more complex transactions they make. The real hallmark of reform would be when someone with multiple streams of income, including from overseas, no longer needs the help of a professional accountant to file tax returns. That day may come, but has not dawned yet.

The new rules also propose to raise the value threshold of assorted perks provided by an employer, ranging from car allowances to office-paid meals, beyond which their value would be deemed ‘income.’ The list of cities that qualify for the highest level of house-rent allowance eligible for concessional tax treatment is being expanded, at long last, to include major urban centres like Bengaluru, Hyderabad, Pune and Ahmedabad. This is welcome.

This might be the right time to move beyond such an eligibility list of cities to a sharper—and far more apt—criterion like a location’s cost-of-living index.

What is not welcome is a proposal to raise the value cap of cash transactions that do not require the folks making them to identify themselves via their Permanent Account Numbers (PANs). Perhaps PAN data submission should be mandated for all dealings that do not leave a clear audit trail.

India’s total tax collections as a proportion of GDP, at around 17%, are still less than half the OECD average. Direct taxes need a broader base in a country where many people who go income tax-free can afford fancy foreign holidays. It is not just rich owners of orchards and big farms who do this, though tax exemption for farmers does demand its own debate.

In general, the well-off must not escape India’s tax net; raising the threshold for PAN-linked transfers will not aid that cause.

While agricultural income is exempt from central income tax, state-level rules vary. Many Indian states do levy income tax on money made from plantations, but they typically balk at taxing income from crops grown outside plantations identified as such. This creates a loophole that many take advantage of to evade tax altogether—which is often done by clubbing together all earnings, whatever their source, as agricultural. This must stop.

If the Centre dares not risk the ire of our farmers by taxing their income, state governments could tax them at rates paid by urban taxpayers. Whenever a rich farming family makes huge cash payments, or tries splitting these among multiple household members to stay below the tax radar, this data should be captured and collated to identify those who wield such purchasing power.

The government should therefore rethink its relaxed PAN mandate. As farm subsidies slowly morph into income support linked to the area cultivated by a farmer (or left fallow to prevent over-production), the state should have a better grasp of who is well-off and who’s hard-up. Tagging the money that people move with their PANs would make that process easier.