Direct Tax Code: Task Force Sounds Alarm Over Money Laundering Loopholes — Exclusive
The DTC Task Force suggests amendments to income tax provisions that allow taxpayers to declare lower profits.
(This is a collaboration with leading tax information portal Taxsutra to publish select in-depth articles on legal and policy matters. This is Part 3 in the exclusive series on the recommendations of the DTC Task Force. Part 1 on the key structural changes proposed by the committee can be found here and part 2 on suggestions to address the decade-old Vodafone problem here.)
The scourge of black money has probably been the biggest impediment to India’s economic growth as massive tax evasion, at the very least, leaves a big hole in government coffers. The Direct Tax Code Task Force has identified some such provisions in the current Income Tax Act, that according to it, are being abused to enable money laundering.
To this effect, the Task Force in its report, makes a prominent mention of the presumptive taxation regime as one which is being abused to launder undisclosed income. The presumptive taxation scheme allows small taxpayers to declare income at a prescribed rate and spares them the tedious job of maintenance of books of accounts.
In particular, the Task Force refers to sections 44AD and 44AE of the income tax law, and suggests amendments to them.
Section 44AD deals with eligible assessees such as individuals, partnership firms etc. whose turnover for the relevant year does not exceed Rs 2 crore. For such taxpayers, 8 percent of total sales or gross receipts of the business is considered as profit on which tax needs to be paid. In case of digital receipts and banking transactions, the deemed profit is equal to 6 percent of such receipts instead of 8 percent.
Separately, Section 44AE is applicable to individuals or entities engaged in the business of plying, hiring or leasing of goods carriages. To be eligible for the presumptive tax scheme, they should not own more than 10 goods carriage vehicles. For such taxpayers, deemed profits are calculated as follows:
- Light goods vehicle: Rs 7,500 per vehicle every month
- Heavy goods vehicle: Rs 1,000 per ton of gross vehicle weight every month
If the profit declared under these two sections is higher than the minimum amount prescribed, the same shall be considered for determining the tax liability.
These two provisions, the Task Force report highlights, are being used as a tax planning tool by businesses in sectors like coaching classes, beauty parlours etc. These businesses are presently declaring a measly 8 percent profit when the actual amount is much higher, the report says. And so, for these two services and others like them where margins are significantly higher, the Task Force recommends a four-fold increase in profit margins.
If the gross receipts of such services (coaching classes, parlours etc.) is below Rs 1.5 crore, the profit margin should be deemed to be 30 percent on which tax must be paid, the report says. For other businesses with turnover up to Rs. 1.5 crore, the Task Force is in favour of retention of the 8 percent profit margin.
Further, professionals like doctors and lawyers who are also eligible for the presumptive taxation scheme must be given relief, the report suggests.
Their deemed profit margin must be reduced from the current 50 percent to 40 percent to encourage such professionals to file returns under this regime, the report says.
Finally, the Task Force strongly recommends the discontinuation of presumptive taxation for transporters who ply heavy vehicles, arguing that these are run by organised businesses who have the capability to maintain books of accounts. It also recommends seeking more information—cash in hand, assets purchased, revenue expenditure etc.—from those who avail the presumptive taxation regime.
Partnership Firms: Capping Deductions
The Task Force also found partnership firms’ income and profit declaration data quite unimpressive. The report highlights the fact that when one adds up profits of over 1 million partnership firms that file tax returns, the figure actually reveals negative profits before tax/losses, mainly on account of salary payments to partners that wipes out profits of partnership firms.
Again, in an important change, the Task Force recommends capping the deduction for partner salaries at 50 percent of book profits, as also reducing the deduction for interest payment to partners from existing 12 percent to 9 percent per annum. The report has recommended retaining the 30 percent tax rate for partnerships.
Arun Giri is group editor at Taxsutra.com.