In a policy paper aptly titled FORCE (Fiscal Options & Response to Covid-19 Epidemic) and presented to the government, 50 officers of the Indian Revenue Service (IRS) recommended five short-term and six medium-term measures, some of which analysts think will end up as a bunch of fives.
The 40-page report includes suggestions to bring back wealth and inheritance tax to raising the super-rich tax and google tax on digital firms to imposing a one-time flat COVID relief cess, to offering exemptions to soft soap corporate taxpayers, to a three-year tax holiday for healthcare businesses.
In fact, FORCE goes one step extra crossing over to its sister wing -- Department of Expenditure -- recommending expert tips on where to cut costs and how to spend it wisely.
The policy brief doesn't actually put a number on total tax revenue the measures can raise, but does give a flavour of the extent of expenditure cuts. For instance, of the total revenue expenditure of Rs 26 lakh crore for FY21, a blanket 10 per cent cut can sock away Rs 2.6 lakh crore that could be used for COVID related works. But more on that later.
Hours after the Force report was made public, the Department of Income Tax 'unequivocally stated that CBDT never asked the IRS Association or these officers to prepare such a report.'
"No permission was sought by the officers before going public with their personal views & suggestions, which is a violation of extant Conduct Rules. Necessary inquiry is being initiated in this matter," the department tweeted on Sunday.
It further added that the impugned report doesn't reflect the official views of CBDT/MInistry of Finance in any manner.
The foremost among the short term (3-6 months) measures include taxing the super-rich as they have a higher obligation in tough times. Drawing inspiration from European economists, who believe taxing the wealthy to be the most progressive fiscal tool, officials suggest raising the top income tax rate to 40 per cent for those earning above Rs 1 crore. If not, it seeks to re-introduce wealth tax with net wealth of over Rs 5 crore.
It's pertinent to note that India has less than 6,000 ultra-high networth individuals, and so it's unclear how much revenue can be mopped up.
Moreover, when Finance Minister Nirmala Sitharaman raised surcharge on the super-rich last year, she was under tremendous pressure and eventually crossed it out in a few weeks. And given the proposed surcharge was to generate a mere Rs 2,700 crore in additional revenue, the officials instead favoured raising the tax rate itself, albeit for a short time.
While at it, they also sought raising surcharge on higher-income foreign companies with a presence in India and increasing the capital gains tax on inherited properties of overseas Indian citizens by 10 per cent. With the lockdown driving digital businesses, they suggested increasing the equalization levy otherwise known as the google tax by 1 per cent for ad services and e-commerce entities to gain big bucks.
FORCE also favoured bringing back inheritance tax abolished in 1986, to do multiple things -- widen the tax base, enhance revenue, bridge the wealth inequality divide and eventually reduce tax rates. If procedural issues and information asymmetry axed this tax in the past, with digitization, it's enforceability appears feasible now, though it's unknown whether the revenue mobilized will justify its revival. For context, collections from wealth tax were next to nothing, prompting then finance minister Arun Jaitely to toss it in the bin in FY17.
As opposed to surcharges, the tax sleuths prefer cess that's levied on all taxpayers and also mobilize more revenue. An additional one-time cess of 4 per cent can mobilize Rs 15,000–18,000 crore revenue to help finance COVID relief work. However, to mitigate the hardship on the middle class, the paper suggests the cess to be imposed on taxable income greater than Rs 10 lakh.
Companies can be allowed to part-spend their unspent CSR funds to PM CARES Fund and for business purposes. In return, they will get exemptions under section 80G for say 3 years instead of one year. The paper even suggested wheedling the wealthy entities to spend up to 4 per cent of the estimated net profit and count it as CSR for two years.
A new tax-saving scheme to mobilize funds for Corona relief, amendments to Section 13A and 13B allowing political parties and electoral trusts to invest in the aforementioned fund, a new amnesty scheme waiving off the interest for tax demands under dispute and even for undisputed penalty amount pending for collection are some other measures.
In the medium-term (9-12 months), FORCE urged the government to incentivize compliance as against penalizing non-compliance by proposing tax discounts and rebates in percentage points for timely compliances.
While for multi-national firms, a US-styled Base erosion anti-abuse tax (BEAT) can be introduced as an alternate minimum tax for corporations with high average annual gross receipts.
Lastly, cueing great delight from the successful 'Give it up' LPG subsidy campaign, the tax department sought to encourage the super-rich and everyone else willing, to give up at least one tax deduction (say Section 80C) for a year.
As for expenditure rationalization, the paper proposed scaling down defense expenditure by postponing acquisitions where the process hasn't started besides putting major projects like the bullet train where no work has begun in the cold storage.
Stressing the need to rejig expenditure budget, it suggested spending Rs 1 lakh crore out of the total Rs 4 lakh crore FY21 capital expenditure towards COVID related works.
Per estimates, the bottom 12 crore households comprising of 60 crore individuals will need support and hence the government should give a direct cash transfer of Rs 3,000 to 5,000 a month for six months, besides enlarging MNREGA budget to ensure guaranteed work for the marginalized.
FORCE comes at a time when India's businesses, small and large, are holding their breath awaiting the government's second stimulus package. It remains to be seen if the government will take the ball and run with it.