Desired objectives of tax policy can be achieved only when it is properly administered. Failure in appropriately administering the tax laws allows tax evaders to thrive. This defeats the purpose of a fair tax policy and threatens the canon of equity.
It is widely believed that tax evasion in India is rampant: in taxes on income and property, and in domestic trade taxes. This needs to be tackled on various grounds. Politically, the most important thing on the part of the government is to have a strong will to fight it out. Administratively, this is possible through the following measures:
There should be just one integrated permanent account number (PAN) for all the central and state taxes including income tax, goods and services tax (GST), stamp duty and registration fee and so on. Under-pricing in real estate is further checked through real estate surveys by zones, which is being done in some states for stamp duty and registration fee.
An integrated management information system (MIS) along with IT-enabled business process model (procedures) for each tax that entails least interaction with the tax department is essential.
It is important to streamline procedures for speedy determination of tax disputes (Special courts need to be set up) and have special focus on training for detection of tax frauds. Deterrent penalty for tax evaders is a must.
In countries like Belgium, Greece and France, there is a provision for confiscation of personal rights like possession of firearms or driving licenses of persons found guilty of tax evasion. A similar law should be put in place in India too. Such persons should also be debarred from holding an elected office, including directorships in companies.
Economically, it would be useful to disentitle tax evaders to avail of the facility of payment of taxes in instalments and getting credit facility from banks. Socially and morally, the tax laws should permit wide publicity (through media) of persons found guilty of tax evasion. Social conscience needs to be aroused amongst people against tax evasion, for attaching social stigma to tax evaders and to work as sentinels for identifying black marketers and tax dodgers.
Estimates may vary, but clearly, the size of the black economy is monstrously large. Several factors are responsible for this. The type of faulty tax structures that we designed for ourselves, the ineffective and inefficient manner in which we implemented and enforced the tax laws and the lukewarm societal disrespect towards tax evaders have all contributed to the mess we are in. Surely, the problem is not acute its chronic. Perhaps we need to move forward in all directions with a bold and renewed agenda.
Take indirect taxes. The goods and services tax (GST) has the merit of self-policing. The confluence of different central and state taxes and duties in the holy GST is the right answer to correct the historical wrongs. But much would depend on the design of GST. It must be comprehensive to cover goods and services alike.
Ideally, it should have one rate for goods and services. Unduly high GST rates or a differentiated tax structure would again throw back the old problems of implementation, avoidance and evasion. Alongside, we need to provide a world-class modern and efficient tax administration using IT and reduce compliance cost for the assessees.
As for direct taxes, history is the best teacher. The experiment with high tax rates with zeal to punish the rich failed miserably. The narrow tax base has eroded the revenue buoyancy. The complicated tax laws and procedures erupted in unholy alliances.
It is high time to realise that moderate tax rates that are perceived as not pinching by the society can only induce the tax evader to change his heart. In fact, a flat tax rate of 10% or 15%, with most tax collected as tax deducted at source (TDS), is best suited to accelerate transition from black to white.
Finally, a new approach in tax administration for both direct and indirect taxes is called for. Peoples aversion to tax departments seems to have gone beyond a simple dislike for paying taxes. The tax laws and procedures must be rewritten. Those who wish to mend their ways and pay taxes or duties should be encouraged rather than punishing so heavily that they turn indifferent.