Where is the simpler tax code and bold strategy to stop tax evasion?
Posted by: Uma Shashikant on Feb 06, 2017, 06.30 AM IST
Sifting through the fine print of the Budget documents is a task many of us are compelled to do. This year, the motivation was low. Each clause and correction was a painful reminder that the Finance Bill remains an annual loophole-filling exercise. After the pains of demonetisation, it is unbearable that when it comes to its Budget, the government has sidestepped hard-nosed strategy and lost its way in the fine print of the Finance Bill.
The Finance Minister began his tax proposals with interesting pieces of statistics to establish poor tax compliance. About 14 lakh companies are registered in India. Of these, merely 7,781 companies make a profit before tax that is higher than Rs 10 crore. Not even half of the registered companies have filed returns. We are either a nation of too many small companies that do not make enough money, or too many rogue companies that won't pay taxes, or both.
The statistics on personal income tax is painful for all honest taxpayers, especially the salaried who comply by paying at source before taking their income home. Less than 4 crore individuals filed their income tax returns. In a country of 127 crore people, that is 3%. That means 97 out of 100 people we routinely see shopping for goods and services, enjoying the luxuries of travel, clothes, cars and food, do not pay taxes. The FM also mentioned that last year, less than 2 lakh people had a taxable income higher than Rs 50 lakh, while 2 crore people travelled abroad for work or pleasure. We are surrounded by tax evaders who go about their lives with absolute nonchalance. This is what we expected the government to fix.
We are a cash economy with a penchant for keeping it black-it is easy to hide the income and avoid paying taxes on it. For all the promise that demonetisation offered about a bold government willing to take any step needed, and a supportive public that stood patiently in queues to access its own money, the budget does little to fix its broken tax policy and strategy. That is the let down.
The FM has promised to mine data offered by the deposits made during the demonetisation drive. Does the government not have enough data already, having set up a huge information network to capture credit card spends, foreign travel, investment details and the like? The boldness that was evident in the drive to demonetise should have been followed up with a solid policy framework that makes it tough for the individual and corporate citizens who earn enough, but do not pay up. In making the budget, there is also the higher-level policy consideration that more revenues mean more to spend and better management of the deficit. There are thus both moral and practical reasons to focus on enhancing the tax revenue.
There are at least three strategic options to consider. First is the expansion of the tax net. Instead of focusing on the few who pay a large amount of tax and imposing higher surcharges on them, it would be worthwhile to bring the evaders and exempted categories into the tax net. A government that seeks the benevolence of the taxpayer to pay a 5% tax out of goodwill (the budget asks this!), should ask why those who earn sizeable agricultural income remain exempt from tax? The Budget could have made it mandatory for everyone with PAN to file an income tax return, with exceptions to very senior citizens over 80 years of age. Given the wide use of PAN in asset transactions, that might have netted a large number. Denying privilege to those who do not pay taxes might have worked too. If passports are invalidated for those who do not file income tax returns, I wonder how those two crore people would travel abroad.
Second is the tax rate. The demonetisation exercise showed that black money hoarders were willing to negotiate in the marketplace, a "discount" that allowed them to convert their black money into white. Every unscrupulous official who colludes with the evaders of the law seeks their cut, and the black market places this cut below the tax rate to make it feasible. The government had the opportunity to learn from these stories and effect a dramatic cut in personal income tax rates. The token reduction in personal income tax rates (effective saving of Rs 12,500 before cess) and 5% reduction in tax rates for small corporates is too little to be called strategic modification of tax rates to enhance revenue, or discourage hoarding and evasion. Many still hope that a grand low-tax strategy will be unveiled next year after substantial homework, also learning from the demonetisation. It's only hope!
Third is the tax administration, including the simplification of the tax code and the myriad rules, provisos, explanations and footnotes. Businesses are willing to pay accountants who would help them minimise their tax burden, and the complex tax code provides enough avenues to manipulate incomes, expenses and massage the account books to arrive at a lower taxable income. The FM himself provided statistics to show that larger businesses paid lower effective rates of tax. Dealing with the tax administration is not very easy. There is the fear of being scrutinised, the onerous task of providing information, the lengthy appeals, and the various interpretations of the law.
If the government wants us to believe that raiding and going after the hoarders as they have done in the recent past is a strategy for compliance, it might be an expensive, intrusive, complex and time-consuming choice. We need a simpler tax code and an efficient administration that is willing to be held accountable for its actions. Then penalties and strictures can be used as deterrents. Raids cannot be a tax mobilisation strategy!
The Finance Bill is a long document with magnificent attention to detail, each word and comma inserted in the appropriate place. The expenditure plan is the usual long list of allocations to various schemes, development being the usual mantra. The aspirational elements are in the digitalisation and modernisation plans. But where is the bold new strategy that will stop fraudulent hoarding of money, and instead fill the coffers of the government so we get better schools, hospitals and infrastructure?
(The author is Chairperson, Centre for Investment Education and Learning. Views expressed are personal.) This article appeared in Economic Times dated Feb 06, 2017, 06.30 AM IST