“Where there is complexity, there is a problem in compliance” – said Indian Prime Minister Narendra Modi as he announced last week the launch of the ‘Transparent Taxation Platform’ – a seamless, painless and faceless platform which seeks to honour the honest taxpayers. This measure seeks to address several critical issues faced by taxpayers, more so on the issue of ‘tax harassment’. To put in context the efficacy of the new measures, it is essential to observe the structure of taxation in India.
Purpose of Taxation
India’s taxation system, as with most economies of the world, functions on the fundamental premise of tax being a mandatory liability of every citizen, generating revenue so as to maximise public welfare. Taxes being a critical form of social contract between the citizen and the state, fewer people paying taxes would mean lesser pressure on the government to use its earnings effectively. Also, it remains important for governments to establish effective taxation systems as it enhances the state’s capacity to spend on national security, public welfare, infrastructure among others. Any efficient tax system strives to include in it a wide tax base with sincere compliance. However, owing to the grossly imbalanced socio-economic status of citizens, the burden of paying taxes invariably falls on a limited section of the population. The burden of ‘direct’ taxes is even more restricted to a few, as it is ‘progressive’ in nature – that it correlates to one’s ability to pay.
Direct Tax Disparity
In a country of 1.3 billion people, for only about 15 million to pay taxes is a disparity that reflects a system with certain underlying flaws that need to be addressed. Within this basket of direct taxes, the onus of paying income tax falls on a minuscule share of about 2.5% of the Indian populace as per the Union Budget 2020-21. It was observed that even within the number of taxpayers, only about 4% contribute close to 60% of tax income. Of the 60 million who file income tax returns, owing to several deductions and exemptions, a large number of them end up paying negligible tax.
An important factor in understanding the government’s persistence with such taxation policies despite an apparent disproportion in tax base vis-à-vis tax collection is the ‘Tax-GDP ratio’. As per the Economic Survey of 2016-17, direct tax to GDP ratio in India is an abysmal 5.2 per cent. Achieving higher levels of tax-GDP ratio is necessary as it represents a rise in tax revenues with respect to the country’s GDP growth, thereby minimising the government’s fiscal pressures in spending on infrastructure and other social welfare measures.
Scope for reforms
Indian taxpayers have often complained of harassment by tax officials, complexity in procedures, delay in reimbursements and a sense of alienation from the system. Tax authorities are not to be entirely blamed as they are accountable for achieving targets of collections in their respective jurisdictions and are to deal with assessment protocols. To combat these systemic lapses, the ‘Transparent Taxation Platform’ calls for a shift towards policy-driven governance that holds its faith in the honesty of the taxpayer and brings out steps and methods to create an efficient, technology-driven bureaucracy. Some of the new measures announced are as follows.
- Focus on banking the unbanked, securing the unsecured, funding the unfunded and honoring the honest.
- Taxpayer’s ‘Charter’ prescribes the rights and obligations of all stakeholders – taxpayers and tax authorities. It aims to provide courteous and reasonable treatment to taxpayers, mechanism for review and appeal, and to reduce the overall cost of compliance.
- Faceless Assessment to do away with face-to-face interactions between taxpayers and tax officials, thereby mitigating the scope for harassment, corruption and overreach by authorities. This measure includes the use of artificial intelligence and data analytics as tools to generate files to be picked up for assessment.
- Faceless Appeal similar to assessment does away with the physical need for an aggrieved taxpayer to make his appeal within his/her jurisdiction. By appealing through the online platform, one’s appeal will be allotted randomly thereby providing a fair chance of appeal to the taxpayer.
These steps have the potential to incentivise people to pay taxes more diligently as it simplifies the system and negates the fear of harassment.
Mixed Signals
However, with recent proposals that call for greater scrutiny and expansion in the scope of data collection, it appears to be leading to an increase in compliance burden that may hinder the government’s plans for a simplified tax regime. In an attempt to widen the tax base, the I-T Department has proposed a wider reporting framework that includes high volume transactions such as jewelry purchase, hotel bookings, business class airline tickets etc. These additional requirements for reporting beyond a certain threshold significantly increase the burden of compliance and may prove to be counterproductive as it may lead to under-reporting or tax evasion.
Way ahead
To achieve the dual objectives of higher tax revenues and a wider tax base, strict compliance and transparency would alone not suffice as tax revenues are a function of multiple factors such as income, tax rate and citizen behaviour. An incentive based approach that enthuses citizens to pay taxes must be the way forward. ‘Transparent Taxation Platform’ is a step in the right direction but there remains a longer journey ahead in creating an atmosphere of respect and trust in the honest taxpayer, who must be honoured and treated with dignity for his/her contribution to the nation’s development. Periodic lowering of tax rates, doing away with frivolous scrutiny, further simplifying reporting standards by reducing paperwork, and amnesty schemes for quick resolution of disputes would be critical steps in ensuring the benefits of tax compliance outweigh the costs and penalties of tax evasion.
References:
Economic Times:
Swarajya:
Hindustan Times:
THE ECONOMICS CLUB IMI 