Tax complexity will encourage evasive culture

The 85 percent input claim restriction enforced on business organisations to deduct the input VAT expenditure from the output VAT tax has a negative impact on prices of consumer items which results in staggering inflation, said Partner Gajma and Co. Chartered Accountants N.R. Gajendran.

He said when products are sold at a low profit margin companies will pass on the ill-effects of the claim restriction on the consumer who will have to pay more on each item.

"When the restriction is applied the company's tax will increase. If the company wants to maintain the same level of profits an upward price revision will have to be effected which will have an adverse impact on the cost of living and inflation", he said.

The claim restriction will not only influence prices of consumer goods but also encourage an evasive culture with the number of those evading paying tax increasing annually.

He said while the composite tax on 10 essential items will have a less impact on prices the new mobile subscriber levy will have an adverse effect on mobile phone users now hitting the three million mark.

A mobile phone is not a luxury item and today it is an essential item used even by people from low income families. Imposing such taxes would be a burden on phone users and a threat to the industry", Gajendran said.

Tax on consumer items has a regressive effect on the consumer. Direct tax has a progressive effect on the individual.

Major variations to policy have to be made through the budget and not in a manner that will affect people who are already saddled with the cost of living.

Even if money is printed or borrowed it should be done as an investment for infrastructure development and not for government expenditure. If money is properly channelled for development the government going for a sovereign bond of US$ 500 million would not be an issue.

He said the issue is why is the Government trying to raise funds at high premium from commercial banks.

Lending Institutions have pre-conditions to which borrowers have to comply. The borrower should ensure that the money is used for productive purposes and there are tangible returns.

Gajendran said the country's productivity needs to be increased by moving away from a welfare state to a 'workfare' state.

LF