In what is just the latest bout of a decades-old carrot and stick approach, the tax department has launched a new campaign to get people to pay up taxes. This time, it's all about making people see the tax return as a status symbol.

To this end, minister of state for finance JD Seelam is planning to visit all the 35 cities that house zonal tax offices in a bid to bridge the gap between taxmen and big taxpayers.

Seelam has already visited cities such as Hyderabad, Ahmedabad, Bhopal and Jaipur. "We would like to create a non-adversarial tax environment. The trust deficit between taxmen and industry needs to be removed. Our target is to make people feel that paying tax is a status symbol. That should increase our collection," he says. But will this approach work?

Tax Returns are the New Black

As economic turbulence continues, finance ministry officials are not quite sure whether the tax authorities will meet the tax revenue target of Rs 12.35 lakh crore this year, as was estimated in the Budget. As far as direct taxes go, till September 17, for which data is available, net direct tax collection was up 12.7% to Rs 2.38 lakh crore, triggered mainly by a 21% increase in the personal tax component. But the concern is with corporate taxes, which is up a mere 8% from a year earlier.

A fifth of total tax revenues is from income taxes while corporate taxes make up 34%. The remainder is from indirect taxes such as excise and customs duties. However, the government raises the bulk of its tax revenues from a very small proportion of tax payers. This has always been the case. As of 2011-12, for instance (see Taxing Times), just 1.3% of tax payers, who earned Rs 20 lakh or more, accounted for around 63% of the income taxes collected.

Similarly, while a few lakh companies are registered in India, 1,746 companies with a gross profit of above Rs 50 crore accounted for over three of every four rupees of corporate tax collected in 2011-12.

In a now oft-quoted statement, finance minister P Chidambaram pointed out in his Budget speech earlier this year that there are only 42,800 individuals in the records of the tax department who have a declared income for tax purposes of over Rs 1 crore.

"The economic situation is not in my hands. But I am sure if we make tax administrators act more as facilitators than regulators, tax compliance will increase. Our effort will be to make tax payers feel proud when they pay tax," says Seelam.

In the past, the government has offered various incentives to get people to pay up. Businessmen and film actors have been felicitated for being highest taxpayers. Only two years ago, Cognizant Technology Solutions vice-chairman Lakshmi Narayanan was honoured as the top individual taxpayer in Tamil Nadu as a part of the I-T department's 150-year anniversary celebrations. In July this year, the Punjab government approved a new scheme to award top taxpayers both at state and district levels. The scheme initiated by the state excise and taxation department is aimed at increasing the collection of state tax, including value-added tax (VAT). But there is a minimum threshold of tax payment to qualify for such awards. For example, a rice sheller will qualify for the honour only if he pays at least Rs 2 crore as tax. Similarly, for mobile dealers, the minimum qualification is a tax payment of Rs 25 crore.

In the past, the government has also announced numerous tax amnesty schemes, with mixed success. For instance, the Voluntary Disclosure of Income Scheme was launched in the late '90s with much fanfare under P Chidambaram as finance minister.

"If the Centre is gearing up for a campaign to honour top tax payers, it's a welcome move. But the problem with any government department is that its left hand does not know what its right hand is doing. You shouldn't be surprised if one wing awards a taxpayer and the other raids him. There is a precedence to that," says Sudhir Chandra, former chairman of Central Board of Direct Taxes (CBDT).

Carrot, But also Stick

Another former CBDT chairman PK Misra says recognizing honest tax payers can only be a small component in the campaign to raise more tax. Coercion needs to continue as the core strategy alongside persuasion. "In Western countries 'I pay tax, I buy civilisation' has worked. It won't work in India. Here nobody wants to part with the money that reaches one's pocket," he says.

An income-tax officer posted in Gujarat, one of India's richer states, agrees. "We have to balance both tactics," he says. "Smaller taxpayers, for instance, are usually in a frame of mind where they will pay tax but don't want to face the procedural hassles. In their case, we should make all efforts to ensure that the process is simplified."

"But there is also a class of hardened tax payers who absolutely do not want to pay tax," he adds. "They use chartered accountants (CAs) and tax lawyers to hide money, and it is important to tackle such people through enforcement, searches etc."