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Widen the tax base with better compliance
December, 06th 2014

Tax policy in India has undergone amendments over time in order to keep pace with the changing business and economic landscape. However, no comprehensive reform of the tax administrative system was undertaken with the same zeal. Therefore, the Tax Administration Reform Commission (TARC) was set-up by the government of India in 2013 to address the need for reviewing the existing systems and processes, identify the areas needing change and suggest measures that could bring about better efficiency and effectiveness in the administration of tax.

The TARC, which was mandated to discuss twelve major areas of reforms, has come up with three reports touching upon nine of the twelve areas. The first report focussed, inter alia, on taxpayer service, dispute management and adoption of technology. The second report focussed on the need to build capacities for customs duty, and in establishing a common framework for information exchange amongst the various agencies.

The third report (Report), released in November 2014, covers recommendations in the areas of (a) impact assessment of new legislation and administrative action, (b) expansion of tax/taxpayer base, and (c) compliance management.

Impact assessment: The Report emphasises the importance of carrying out an extensive impact assessment for any decision relating to taxation: policy or administrative. It also discusses various elements of an impact assessment, which includes stakeholder consultation, surveys and systematic data collection, cost-benefit analysis and identification of risks.

The overall theme of the recommendations is coherence and consistency of policies, keeping in view the objective of better regulatory management.

Expansion of tax/taxpayer base: The recommendations here are aimed at improving tax collections and achieving a broader tax and taxpayer base by bringing in new taxpayers and targeting sectors that remain under-taxed or untaxed, as against putting a heavier burden on existing taxpayers. Some of the recommendations are:
* Closer co-ordination between agencies and streamlining of processes to, inter alia, trace assessees not filing returns,

* Expanding the coverage of provisions relating to Tax Deduction at Source (TDS)/Tax Collection at Source (TCS) to more transactions; the Report highlights that TDS/TCS leaves behind an audit trail that acts as a deterrent to tax evasion and aids in the collection of tax at the transaction stage itself,

* Re-introducing the Fringe Benefit Tax (FBT) regime and the Banking Cash Transaction Tax (BCTT), which were withdrawn in 2009; the Report mentions that FBT is a good temporary administrative measure for enhancing tax collection—until rising income tax collection makes it unnecessary—and also looks at BCTT as an important tool to monitor transactions of unaccounted money,

* Bringing agricultural income into the tax net and tapping farmers with high incomes; towards this, the Report recommends an income threshold of R50 lakh, and, in the same vein, it also highlights that such a change may require a Constitutional amendment and a buy-in of the states,

* Using presumptive tax schemes for small businesses with a view to ease and encourage compliance and,

* Reviewing various exemptions under different tax laws, and widening of the wealth tax base.

Compliance management: The recommendations of the TARC under this category seem to be woven around the philosophy of creating a culture of compliance that is founded on the values of trust, transparency, accountability and easier compliance.

Among others, the TARC emphasises on taxpayer-focus and a trust-based administration. It also recommends the issuing of timely clarifications/positions by the authorities to reduce disputes, review and improvement in the quality of orders passed by the authorities, from the perspective of fairness, legality and propriety, irrespective of the revenue consequences. In line with international practices, the TARC also recommends multi-year audits as against the current single-year audit.

While making its recommendations, the Committee has also drawn upon experiences of other countries and has taken into account inputs from various stakeholders. It is indeed encouraging to see that the recommendations have emphasised heavily on inclusion of stakeholder’s perspective in policy-making, and making the compliance system user-friendly so that more people are encouraged to pay taxes, not avoid them.

Recommendations relating to identification of non-filers, improving the reach of the presumptive taxation and TDS/ TCS provisions could be seen as welcome moves that could help widen the tax base and promote equality amongst taxpayers. However, recommendations such as return of the FBT and BCTT could potentially receive strong opposition from the industry and stakeholders and one would need to weigh the benefits with the increased cost of compliance and administration.

In summary, the recommendations of the TARC are in sync with the approach of the government, of ‘minimum government and maximum governance’. One would now have to see how the government considers the recommendations made by the TARC to enhance the effectiveness and efficiency of tax administration. One could even expect some of the recommendations to be incorporated in the Union Budget for FY16.

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