Betting is also taking place at a most unlikely level, with much higher stakes at risk.
The US and the leading EU economies are amongst those betting that when their governments reign in fiscal stimulus packages by cutting spending and raising taxes before recovery is assured, their private sector will step in to drive growth in their economies. The concern is whether such measures will likely spook consumers, businesses and investors and makes things worse.
So why do policy makers take on this risk when recovery is still fragile? The worry is their huge deficits and the fear that the financial markets will turn on them, as they did on Greece, if they delay deficit reduction. So countries seek ways to curb spending and raise taxes. They try not to tax mainstream businesses as these are relied on to push growth. Increasingly they turn to uncommon measures to help fill their tax coffers. Thus we see some 10 countries across the globe introducing tax amnesties, the US and its whistle-blower reward programme and India bringing in a presumptive tax scheme on top of a capital gains tax on share transactions.
What is presumptive tax? Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer’s accounts. There is a legal presumption that the taxpayer’s income is no less than the amount arrived at from using the indirect method, thus the term “presumptive”.
ndia’s presumptive tax system applies to three types of businesses — civil construction, retail trade and transporters. Under the scheme, businesses with revenues up to Rs40 lakh will have the option to declare income at 8% of their turnover and be exempt from compliance procedures such as maintaining books of accounts. In addition, they will be allowed to pay the entire tax from their business only at the time of filing the return and not in advance. The taxpayer may file accounts and pay tax based on these accounts. This is a rebuttable presumption; an irrebuttable presumption is when no option is available.
The presumptive method has the following advantages and disadvantages:
Accuracy: It is less accurate than the classical tax based on a bookkeeping system and thus it violates the principle of taxation based on the ability to pay.
Horizontal equity: The argument is that it violates horizontal equity since equally well-off taxpayers may end up paying different taxes.
Efficiency: It is in effect a lump sum tax with zero efficiency cost.
Simplicity and compliance costs: A small business keeps books only to satisfy the tax authorities and presumptive tax enables it to avoid such costs.
Equal opportunity: Businesses could view this as in effect a license fee, which is paid without further intervention.
The major issue is that the tax seems arbitrary: This feeling can be reduced if the authorities seek to convince the public that the tax is fair.
Progressivity: Since it imposes a ceiling on the tax it is no longer progressive, taxpayers within the same group with different income levels pay the same amount of tax.
Presumptive taxes are well entrenched although it may not be classified as such. The Malaysian tax system in fact adopts the presumptive tax approach in certain circumstances.
If a taxpayer has substantially understated his or her income, and the transactions giving rise to income cannot be traced, the tax authorities are authorised to assess income on their best judgment. The commonly used method, in the course of a “tax investigation”, is the net worth method. This involves the determination of the change in the taxpayer’s net worth over say a number of years and adding to this amount the estimated personal consumption expenses, determined by examining the taxpayer’s lifestyle.
The estimate of income for each year can then be made. This approach in theory cannot be faulted since income can be defined as consumption plus change in net worth. The difficulty is in using imprecise estimates in the absence of factual information. The courts have nevertheless allowed this method to be used.
Apart from India, the presumptive tax system has been used in France, Mexico, Pakistan to name just a few. Whether it should be extended in Malaysia to specific small business operators will depend on the level of non-compliance in this sector.
If it can be shown that the presumptive tax base to be adopted is close to the tax base the business operators will otherwise pay tax on, then the tax will likely be acceptable. This needs careful study. Presumptive taxation remains a relevant option in helping raise Malaysia’s tax revenue in its efforts to reduce the country’s deficit position.
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