The Big Picture – How to Widen the Tax Base?

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How to Widen the Tax Base?

At a conference titled ‘Rajasva Gyan Sangam’ (Knowledge Conference on Revenue) consisting of participation from top officials of CBEC and CBDT, PM proposed RAPID – Revenue, Accountability, Probity, Information And Digitisation of taxation for accelerating the tax base net and improve efficiency of tax administration.

Out of the population of 125 crore, the current tax base is 5.3 crores. The current initiative is expected to double the tax base to 10 crores by bridging the trust deficit and approaching the taxpayers with ‘soft and sober’ behaviour.

Lot of positive tax reforms have happened since 1991. Income tax rate was extremely high (97.5% in 1973-74) which has now been brought down to 30% which is the lowest in world till now. Tax mobilisation has also gone up and tax base increased. Tax base expansion and contraction also depend upon economy à Growing economy, people pay more. Economy on downturn, people don’t.

The worldwide trend to have a broader base is to have non-distortionary tax, i.e. government shouldn’t tax some more and leave some totally out of it. This creates an attitude of evasion and avoidance amongst those who pay. GST as a means of non-distortionary tax will play a major role in encompassing more in tax net due to uniform tax rates for different layers of society. The impact on fiscal consolidation and higher Tax-to-GDP ratio will also be visible.

Kelkar Committee report mentions the ‘missing middle’ which include professionals (CAs, lawyers, doctors) who do not pay taxes. However, government has presumptive taxation measure for them. But, other middle class like small retailers who are not in tax net have no presumptive taxation. Efforts on more presumptive taxation options to businessmen and professionals in Tier-1 and Tier- 2 cities will aid in widening the tax base. Others include HUF, and rich farmers too.

Out of 25 crore households in India, 15 crore belong to agricultural sector which are exempted from taxes. However, taxing agricultural income is possible beyond a large threshold limit. Also, the parallel economy existing in India of unaccounted incomes and expenditures (black money) needs to be unearthed. Cashless economy should be way forward as majority tax evasion occurs in cash transactions. Less cash utility will turn the people towards tax compliance.

For successful implementation of tax reforms, the funding of political parties need to be more transparent.  This relieves the pressure from companies and wealthy individuals who have to generate black money to pay to politicians, bureaucrats, extortionists and instead comply with taxation policy. So, it is not about just lowering the tax rate but also creating situation where entities don’t have to amass tax evasion to pay political system.

GST is sought to be a major revolutionary tax reform where it is expected to leave information trail. Compulsory KYC on investments has also led to registration of information. Data collection sources have increased with filing system, social networking sites, travel accounts etc. The task is to consolidate and assess the data and include them in tax base without any harassment. The tax collection framework needs to be charted out to bring people in tax foray who belong to three categories.

1. Some want to pay tax but scared of being mad treated so avoid being in fold. Its low hanging fruit which government can target
2. Some are completely out of framework and GST is going to be huge leap for them
3. Some people don’t want to pay taxes and keep themselves away from taxation book. Government needs to target them.

Thus, government has to assure that tax payers will not be badly treated. For this, the tax regime should be made non-adversarial and more incentivised. This doesn’t mean no taxes. It is non-feasible as government needs resources to perform. Hence, to capture potential tax payers, government needs to follow ‘one government approach’ where data of CBEC and CBDT are integrated to get a holistic information. Tax evasion takes place the most in indirect taxes and thus, GST will be helpful in data consolidation. When people know they are being monitored, they pay taxes honestly. Instead of target-based approach, compliance based approach should be adopted.

Way forward:

• Transfer pricing, minimum alternative tax, and plans to unearth black money are all various manifestations to widen the tax base.
• The economic Survey has also called for widening of the individual tax payers’ base, as nearly 85 percent of the economy remains outside the tax net.
• Implementation of Tax Administration Reform Commission (TARC), headed by Dr. Shome which includes merging of CBDT and CBEC, use of PAN, simple laws among others to increase tax buoyancy.
• Less of big bold tax reforms and more of structural tax administration reforms is essential.
• Instead of excessive focus on auditing, care should be taken to create tax payer service. For example, UK’s HMRC brought cooperative compliance by analysing tax payer’s data and the Customer Relation Manager helped them in paying tax by removing adversarial aspect. From 5000 sample tax payers, they collected additional 2 billion pounds of taxes.

Key words

Tax administration= Implementation of taxation rules and regulation which includes ties include identify cation and registration of taxpayers, processing of tax returns and third-party information, examination of the completeness and correctness of tax returns, assessment of tax obligations, (enforced) collection of taxes and provision of services to taxpayers

Presumptive taxation= As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.

Tax to GDP ratio= Total government tax collections divided by the country’s GDP. India has 17.7% (Sweden= 54%)

Refer:

The curious case of the missing Indian taxpayers

Tax Reform-Changing Paradigms

AIR Debate – Tackling off Shore Tax Evasion