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To raise revenue, go after those outside the tax net
November, 09th 2011

The government wants to keep a close watch on tax payments by corporates to shore up revenues. That is barking up the wrong tree. Since liberalisation, tax reform including lowering the rates of tax on corporate and personal income and abolition of wealth tax on shares have made for more honest financial reporting. Companies report higher incomes to raise their market valuations.

Therefore, stepping up vigil on BSE 500 or Nifty 50 companies makes little sense as their tax returns are automatically picked up by the tax department's computer-assisted system of scrutiny. To garner more tax, the government should widen the base of tax and stop black money generation. One, it should go after tax dodgers, especially those in the unorganised sector. This requires creative use of technology including robust surveillance architecture to pick up patterns of tax evasion.

India has the needed IT prowess. Already, the tax information network (TIN) gathers data on spending patterns of individuals. A more efficient TIN and a foolproof PAN would help identify potential taxpayers. Two, the tax department should also widen the coverage of annual information returns ( AIR) that track spending patterns. It should lower the threshold for real estate transactions, where tax evasion is rampant, even if this raises the volume of transactions processed by TIN. Three, databases on direct and indirect taxes should be linked.

Today, even small producers who execute contracts for the government pay value added tax ( VAT). Capturing their data, including consumption of inputs such as electricity, would give a clear picture of their actual production and income. Their income-tax liability will be known once the database is linked to the database on direct taxes. Four, the government must implement goods and services tax ( GST) from the next fiscal year. It will improve compliance both in direct and indirect taxes.

Reform of political funding would take away one reason for companies to generate black money. Widening the tax base would open the way not only to higher collections, but also to lower rates, inducing yet more compliance.

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