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What good are tax reforms if not implemented
December, 11th 2014

The Tax Administrative Reforms Commission (TARC), under the chairmanship of Parthasarathi Shome, submitted its third report on 30 November 2014. In this report, it considered measures required for deepening and widening of the tax base and taxpayer base, as well as a system of improving taxpayer compliance and measures to encourage voluntary tax compliance.

The report rightly identified that the major contributor to the low tax base is the large-scale cash economy. According to TARC, this comprises mainly of the unorganized sector, high net worth individuals and small businesses.

The reason for the poor attitude towards tax payment has been identified as the perception that the tax system is complicated and not taxpayer friendly. Other factors identified are the large number of tax exemptions and incentives, poor enforcement, a poor tax climate with absence of trust between the tax administration and the taxpayer, and inadequate customer focus, leading to poor awareness of compliance requirements.

Besides simplification and improvement in procedures to make them more taxpayer friendly, some of the measures recommended by TARC include reintroduction of fringe benefit tax (FBT) and banking cash transaction tax (BCTT), enhancement of the scope of presumptive taxation and gradual migration of such taxpayers to regular taxation, encouragement of use of debit cards by small traders, providing fast track educational and housing loans for taxpayers, taxing agricultural income in excess of `50 lakh, increase in the wealth tax base by including financial assets in taxable wealth, simultaneously raising the exemption limit and lowering the wealth tax rate, creating a separate cell for taxation of high net worth individuals, phasing out of unwarranted tax exemptions, better use of technology-based information and intelligence systems to identify potential taxpayers, targeting surveys based on growth trend in sectors and industries, and setting up of a tax forum to analyze procedural issues and solve them quickly on an ongoing basis.

While most of these recommendations are welcome, the real challenge lies in their implementation. Several of these measures have been tried in the past, but with no significant impact on tax evaders.

The persons responsible for implementing these measures chose to just create a record of implementation, without real implementation in spirit. Who would want to take the effort to go out in the field, when the targets can be shown as being achieved sitting in the office? Targets were set and shown to have been achieved, without any real impact on the black economy. There was no monitoring or subsequent sustained follow-up to ensure that the real objectives of these measures were met.

Today, any common man knows which sectors and which set of persons regularly deal in black money. In fact, even the White Paper on black money presented by the government last year spelt out some of these sectors.

The black money within the country is far greater in quantity than the black money that the government is chasing in Switzerland. But what are the efforts really being made to bring out this black money? Is it so difficult to do something within the country that’s being done abroad? Or, is there a lack of political and bureaucratic will to actually do so?

BCTT was introduced a few years ago and withdrawn just before elections were due. What was the logic? I am sure anybody can draw the conclusion, given the spate of cash seizures by the Election Commission during recent elections. Is it going to be reintroduced now that the elections are over, only to be withdrawn before the next round of elections?

Most of our politicians claim to be agriculturists, and have substantial agricultural income. What is the likelihood that they would adopt a constitutional amendment to tax such income?

Agricultural income is the easiest form of tax evasion, since most transactions in the agricultural sector are conducted in cash. It is, therefore, fairly easy for a person to declare certain cash deposits as agricultural income, so long as she is the owner of agricultural land, as it is extremely difficult to prove otherwise.

Real estate is another sector where a substantial amount of black money has been invested and is generated. If an investigative website, with its limited resources, can prove the existence of shady transactions and black money in this sector, why is the tax department, with the large amount of resources at its disposal, unable to do so?
On the other hand, it is extremely convenient to levy wealth tax on shares, which are productive assets, held by taxpayers who have duly paid their income tax.

Similarly, levy of FBT is a low hanging target, given the large number of employees, and the consequential large expenditure on their perquisites. This tax would, however, only burden existing taxpayers further.

One, therefore, wonders whether, with the change in government, there is the political will required to really implement the suggestions made by this report to target the black economy and non-taxpayers, or whether it will selectively implement only some of the measures that it thinks convenient, while quietly ignoring those that are inconvenient. Would one have to wait for the Supreme Court to direct the government to finally act against domestic black money? Only time, and the next budget, will tell.

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