Fiscal governance needs to improve significantly to apply both moral and deterrent pressures on the sizeable segment of income earners who fail to, or under-pay, their taxes. For this, one, there must be improved transparency in the tax legislation process, where Parliament actively debates the issue to bring out the real benefit to the economy. And, two, there must be accountability of the administration of taxes not collected due to evasion.
The Indian tax psyche even now carries the scars of the policies of the heyday of Nehruvian socialism. Those were times when tax rates climbed to ridiculous levels and earning one's legitimate means and possessing wealth of even moderate proportion was almost viewed as a sin. Despite the avowed change in direction in the tax policies since 1984, the inveterate suspicion that mutually exists between the tax administration and the taxpayer has not changed much.
This is a palpable reality, though clearly at variance with the `atmosphere of trust,' as claimed by the tax administration. The most telling example of the absence of trust would be the series of advertisements in the media by the tax administration warning errant the taxpayer of the consequences of default in payments. This would be money well spent if there existed a class of taxpayers who needed to be told of their obligation to comply and it also hastened to do so when prodded. To a discerning mind such a class doesn't exist. Either the taxpayer complies with the law, fearing the consequences, or he does not, regardless of the penalties.
Booking real offenders
The Indian tax system has long nurtured a suspicion of taxpayers, but did precious little to book the real offender. While assessees who comply with the obligation generally face a high level of investigation and scrutiny, thos who manage to keep out are seldom detected and penalised. A trite commentary of the ineffectiveness of the tax authorities is the glaring example in Delhi. Here there are more number of high value cars sold annually, than the number of taxpayers in the income bracket above Rs 10 lakh. Such examples can be multiplied for many other cities and by facts of ownership of other assets such as farmhouses, villas and financial investments.
Likewise, the taxpayer, despite the more moderate levels of taxation, for ethical and practical reasons, either under-pays taxes or avoids payment. The ethical angle comes from the government, which has over decades shown itself to be a poor allocator of taxpayers' money. Those paying taxes see very little social payback. And, admittedly, only a portion of the money spent by the government reaches the targeted purpose.
The dudgeon of being cheated by the political system is possibly the strongest reason for non-payment of taxes. The practical side is that the tax administration over time has failed to set examples that can uphold its ability to administer taxes without bias and demonstrate its independence from political interference. While the government periodically totes out statistics of raids and detection of tax evasion, in a country that has by all admitted evidence a black economy at least half the size of the real economy, the examples of prosecution of high-profile taxpayers are hardly any.
A potential tax evader takes solace in the fact that if should he be caught, he can escape or mitigate the cost by resorting to influence or corruption. The level of tax compliance among the political class is a good barometer of the state of tax administration in the country.
The almost periodic disclosure schemes that put a tax evader in a better footing when someone more compliant has denuded the argument against tax evasion of any moral dimension.
Thus, the issue of poor tax harvests in the country that is represented through an abysmal tax-GDP ratio has very deep-rooted reasons and is not a mere statistical distortion.
It is unlikely this phenomenon will change in a hurry. However, fiscal governance needs to improve significantly to apply both moral and deterrent pressures on the sizeable segment of income earners who fail to, or under-pay, their taxes. A few issues that cry out for correction are:
Improved transparency in the tax legislation process, where Parliament is not a mere rubber-stamp of the Executive's thinking but actively debates the issue to bring out the real benefit to the economy or otherwise of each action.
While the examples of poor legislation are innumerable, the recent introduction of the Fringe Benefit Tax is a classic instance of a misguided legislation, pushed through despite much opposition outside Parliament.
In fact, all revenue legislation should be subject to a review process by a committee of legislators that extensively debates the matter outside Parliament to reflect the informed view of all those impacted by it.
All tax incentives must be justified with a transparent cost-benefit value to the economy. This will ensure segments that do not enjoy any incentive at least know the clear value to the economy of such sacrifices.
The most significant issue with the psyche in tax compliance is the feeling that the cost of detection is not a deterrent.
The tax administration should set examples bt bringing to book high-profile tax offenders.
The accountability of the tax administration of taxes not collected due to evasion is completely absent. It is important to create that accountability to inspire those at the edge to comply more voluntarily.
One of the major causes of tax evasion and an excuse offered by those not paying their dues is the fact that the tax administration is seen to be getting away when so much evasion is quite evident.
To create a basis for fixing the accountability, the Government should, with expert assistance, keep score of taxes evaded in each geography and also the evasion detected in a given period. This may be inaccurate to start with but experts will agree that there exists enough basis to initiate the process of monitoring and making the senior tax administration accountable for it.
V. Ranganathan (The author is a member of the General Committee, Madras Chamber of Commerce and Industry.)