Wednesday, 23 January, 2013

Igniting the Animal Spirit of the Markets - Part 3

Igniting the Animal Spirit of the Markets - Part 3

Pre-2014 Suggestions for our Finance Minister & the Prime Minister

As planned earlier, I'll keep coming up with a series of "quick-gun-Murugan" suggestions. You can see Part 1 of this series in the following link:
Here's my third suggestion:

Changes to Income Tax Laws - 3

A common complaint against the corporate world is that they use the services of lawyers and chartered accountants to ensure that they pay much less by way of income tax than what they ought to as per the law of the land. In this post, we are addressing this situation to a certain extent

Introduce a very minor but significant change in the Income Tax Act for taxing corporates:

  • Definition of Profit and Disclosure of Profit figures:
    • It is known that companies have used the loophole of various laws to come up with different profit figures for different purposes - One for the banker, one or the shareholder, one for income tax authorities, etc. We propose that henceforth the companies will be completely free to come up with any number of profit figures subject to certain basic conditions:
      1. Before disclosing any profit figure of the company(quarterly, half-yearly or annual) to any person or entity, it shall be mandatory to communicate such figures in writing through email to the Registrar of Companies and in case of companies listed on any stock exchange, the communication is to be sent to the Registrar of Companies and to each stock exchange on which the companies shares are listed, as well as to the Securities Exchange Board of India. The chairperson of the Board of Directors, the CEO of the company, the CFO of the company and the Company Secretary shall be jointly and severally responsible for compliance of this provision.
      2. Of the various figures of profit so declared, Income Tax shall be calculated on the highest figure and any dividend declared will be calculated based on the lowest figure.
      3. Stringent conditions for false declarations by the individuals responsbile for compliance of the above shall be applicable in line with suggestions given for individual assessees in the first post of this series (Part 1)
Benefits of the above proposals:

  • The temptation to quote different profit figures and "play around with figures" to increase loan eligibility, to decrease taxes, etc. will be eliminated at one go.
  • Corporate governance will improve radically and immediately at least so far as the profit figures are concerned. Those individuals who are responsible for compliance will take care of it!
  • The propensity to "cheat on tax" will be minimised. Again partly due to the simplification, but more so due to the strong deterrent punishment. The threat of actually going to jail will ensure that people remain honest in their income and tax liability declarations.
  • For obvious reasons, NO political party will be able to meaningfully oppose these proposals - The politicians from ALL political parties who oppose these proposals will stand accused of being influenced by the money-bags from corporate lobbies!


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