Reform of direct tax system urgently needed
Senior Financial Journalist
Collecting taxes is one of the key responsibilities of a government. Without an efficient revenue administration, it is simply not possible to run a country. In some countries, including India, the tax collector is seen as a bogey man and any communication from the department, barring refunds, is viewed with dread. Revenue-mobilising agencies in this country can carry out raids on those suspected of having large amounts of unaccounted wealth. In other countries, these authorities are equally formidable. The Internal Revenue Service of the US, for instance, is a powerful organisation, used often even to nab criminals, wanted for other crimes. Notorious gangster Al Capone was actually arrested and tried for tax evasion rather than for his violent depredations.
The problem that has arisen here, however, is that more often than not, the revenue authorities use their wide-ranging powers to badger innocent taxpayers who may have committed minor errors. Or, in many instances, those who have not committed any mistakes at all. It is a badly kept secret that corruption is endemic in the country’s revenue administration owing to the licence given to levy penalty and harass taxpayers.
Large businesses have a plethora of lawyers and chartered accountants to deal with the tax agencies, but small businesses and start-up entrepreneurs do not have the luxury of spending endless amounts of money on such tax experts. Neither do individuals, but most have no option but to invest hard-earned money in CAs to ensure that tax returns are filed without hurdles. The most dreaded scenario is to find that a particular case has come under what is described as ‘scrutiny’. This means it has been selected randomly for thorough checking, which can sometimes turn into harassment.
Successive governments have tried to both simplify the direct tax system as well as to reduce the interface between tax officials and the taxpayer in a bid to weed out corruption from the system. There has been some success in providing a simple tax form to encourage taxpayers to file returns themselves without relying on experts. One former finance minister had publicly advised the revenue department to stop random scrutiny of most taxpayers who had duly paid their taxes and, instead, focus on low growth sectors. This did not appear to end the practice.
The NDA government went a step further and introduced online payment of taxes which has surely helped many of those filing returns. At the same time, it has actually presided over an era in which the charges of ‘terrorism’ by tax authorities have increased, rather than the reverse. Pressure by tax officials was reported to have been one of the reasons for the suicide by coffee tycoon VG Siddhartha, which led to a considerable outcry by the industry. Similarly, the decision to levy taxes on start-ups at a time when initiatives like Start-Up India were being launched has been a case of contradictory policy approaches.
Solutions to resolve the seemingly intractable issues of red tape and harassment by tax officials have already been provided in several voluminous reports submitted by the Parthasarathi Shome Committee on tax administration reforms. Some proposals were accepted recently, such as the ones regarding pre-filled income tax forms.
Another key suggestion that may prove trickier to implement is to abolish the post of revenue secretary, which, the committee pointed out, is usually occupied by an IAS official with little knowledge of the subject. The proposal is in line with international practice to separate the areas of revenue policies and revenue collections. For instance, in the US, there is an office of tax policy under the Department of Treasury. It makes policy and this is then implemented by the Internal Revenue Service.
In contrast, tax policies and tax collections here are carried out by the same agency: the Central Board of Direct Taxes under the purview of the Revenue Department. This becomes a conflict of interest and policies tend to be framed to suit the needs of the tax collector rather than for larger public good.
The Budget has given an indication, however, that some reforms are in the offing in the system of tax administration. The first is the concept of the taxpayers’ charter which enumerates the rights of taxpayers. It will apparently have a statutory status and, hopefully, empower citizens by ensuring a time-bound delivery of services. According to the CBDT chairman, the aim is to move from being an ‘enforcement’ agency to a ‘service-oriented’ one. This encouraging statement may be received with some cynicism by taxpayers who have for decades seen the worst face of the income tax regime. If this is carried through effectively, however, it could very well be the beginning of the much-needed changes in this sector.
The second is the decision to offer a dispute settlement scheme to resolve the 4.83 lakh tax cases currently pending in various courts and tribunals. The Vivad se Vishwas scheme is expected to see closure to disputes involving a few lakh crore of rupees. It comes on the heels of a similar scheme for indirect taxes that yielded positive results and considerable inflow of funds earlier locked up in disputes.
These appear to be small steps in the right direction. But it is high time for the government to stop carrying out reforms in an incremental fashion. It needs to pay heed to the proposals made by the Shome committee regarding the tax administration and carry out long-awaited restructuring without any delay. The most significant recommendation is the one to separate the departments formulating tax policy from those handling revenue collections. It is time for the direct taxes department to convert itself into an agency for policy implementation while another larger body, preferably a taxation council, takes over the task of framing the actual policies.
It is only when this major revamp takes place that it will be possible to alter the way in which revenue collection agencies function in this country. One can only hope that Finance Minister Nirmala Sitharaman is able to bite the bullet and carry out this much-needed reform without further delay.
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