The panel advocated the EET (exempt-exempt-tax) principle in treating savings; in that, withdrawals from an accumulated corpus of pension schemes and provident funds would be taxed, unlike today, when they are tax-free.
The report also proposed bringing back wealth tax to further progressive taxation. The threshold for wealth tax was kept at Rs 10 crore of net wealth (gross minus liabilities/debt), with valuations of assets at their cost at the end of the financial year.
The report, submitted by Arbind Modi, former member of the Central Board of Direct Taxes who headed the panel, was not accepted as the final report due to objections raised by a few panel members, sources said.
Business Standard has reviewed a copy of the report.
The liberalised tax structure would lower revenues from personal income tax, according to the report. But this would be compensated by a higher corporation tax, and make direct tax reform revenue-neutral, it said.
The report, which ran into four volumes and more and 800 pages, said it vowed to “complete the unfinished agenda” of income-tax reforms initiated in the Union Budgets in the last few years.
It said India’s economic “prowess” made it better-placed for structural reform in direct taxes to supplement the already rolled out indirect tax reform.
Raising the threshold to Rs 6 lakh would entail scrapping salary incentives such as house rent allowance (HRA) and mediclaim, keeping investments in savings instruments such as provident funds untaxed up to a limit (as is the case now), the report noted.
In an alternative package, the report kept slabs more or less unchanged, with incentives and special deductions as in the current system.
It proposed taxing lump sum withdrawals from accumulated savings from instruments such as the National Pension Scheme (NPS) and public provident funds (PPF), a sharp change from the nearly EEE status (Exempt-Exempt-Exempt) now.
Incidentally, the government has reduced the tax incidence on withdrawals from the accumulated NPS by exempting 60 per cent lump sum withdrawal from tax.
The move to EET would be a disincentive for an individual to resort to conspicuous consumption using a corpus built over years, and would rather “smoothen” consumption over her lifetime. At the national level, it would help build social security at old age for citizens, the report said.
Individuals would need to pay tax on dividend from equity holdings and capital gains at the income tax
rates applicable to them, according to the proposed model.
In tax administration, the report recommended mandatory return filing even for those whose incomes were below Rs 6 lakh, subject to certain conditions such as owning assets. Removing multiple deductions and incentives would make compliance easier and reduce litigation, the report said.
It proposed paperless and faceless assessment — which is in the works — and payment of cost to aggrieved taxpayers who face incorrect assessment proceedings. To balance this, it recommended graded interest rates on outstanding tax debt from wilful individuals.