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The threat of harsh penalty should not impede tax compliance
July, 12th 2017

The Employees Provident Fund Organisation added over 10 million new subscribers after employers got an opportunity to file declarations for their unregistered employees with a nominal fee of Rs 1 per annum. The amnesty proved a pragmatic way to improve compliance.

The income-tax department must learn from this example. Demonetisation has induced many to file their tax returns. It has also convinced many unlisted companies to bring their concealed incomes onto their books, boosting sales, profits and tax collection. Now, the goods and services tax, which induces people to pay tax and maintain formal accounts, will bring many individuals and companies into the tax net.

The question is, should these new taxpayers be badgered for their past absence from the ranks of taxpayers, or welcomed aboard as future good citizens? There is a strong case for pragmatism, given that the prospective benefits of expanding the tax base far outweigh those of retrospective retribution.

GST creates an audit trail of value addition across the income and production chain, resulting in a unified base of tax potential that can be tapped into by collectors of both direct and indirect taxes. It gives the government the handle to increase more direct tax revenues. But the government should not go after the past undisclosed incomes of businesses that start paying GST — just as it had not when it allowed EPFO employers who had not been enrolling their employees in the EPF to turn legitimate. Once their income becomes above board, the base of taxation would rise permanently, and the exchequer will be the loser if they are made to stay below the honesty line.

About 4 per cent of people file tax returns; and just a few thousand admit to having incomes higher than .Rs 1crore a year. The focus should be on systemic changes to stop generation of black money, not on punitive expeditions into the past. Remove the glaring exemptions in GST, incentivise people to come out of their old mindsets. The threat of harsh penalty should not impede a possible mass migration to tax compliance.

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