Tap technology, data for ease of paying taxes
Sushma Ramachandran
Senior Financial journalist
The news about the Indian economy has become even more grim. The latest data shows growth in the second quarter of the current fiscal was the lowest ever for the past seven years. It dipped to 4.5 from 5 per cent in the earlier April-June quarter. No one is quite sure whether the growth slide has bottomed out but Finance Minister Nirmala Sitharaman is now holding out hope that more initiatives are on the way to try and stem the fall. At a recent conference, she hinted that measures are under way not only to cut personal income tax for the middle class but also to rationalise the direct taxes system. While the first will be a short-term palliative, it is the fixing of the direct taxes code (DTC) that is absolutely essential to ensure that the revenue administration becomes more modern and assessee-friendly.
A cut in personal tax rates has been suggested by many analysts over the past few months to provide a much needed boost to consumption. But the fact is that only about six per cent of the population is in the income tax net. And most of those paying taxes consistently come into the category of the salaried classes. Though the tax net has definitely widened, there is still a huge proportion of those who describe themselves as self-employed professionals as well as traders and small entrepreneurs who simply avoid paying taxes. Former Finance Minister P. Chidambaram had set the ball rolling to widen the tax net by identifying those who have telephones and passenger vehicles within this ambit. This has no doubt been expanded even further by the present government, but there is a long way to go before the tax base is sufficiently widened to cover all those who should be in this category.
The issue of agricultural tax also remains problematic. Bringing the rich farmers under the tax net has been the question for many decades. At a time, when the government needs to undertake large-scale agricultural reforms, this is one of the aspects to be considered seriously. It is only a government with a comfortable majority in parliament that can move ahead with such politically unpalatable reforms. It is unlikely to do so since the rural economy is in dire straits and also because it has been slow to carry out even other reforms in the agriculture sector.
On the issue of cutting personal tax rates, former RBI Governor Raghuram Rajan, in his latest prescription for giving a stimulus to the economy, has weighed in and opposed such a move. Instead, he proposes that the government should put more funds in the Mahatma Gandhi National Rural Employment Guarantee programme, rightly pointing out that this would put money in the hands of the rural poor. This is a much wider group than the personal income tax segment as has been argued in these columns as well.
Having said that, it would indeed be a step in the right direction if measures are taken to rationalise direct taxes. The government has already given relief to those with a taxable income of up to Rs 5 lakh annually. It may change the existing slabs to provide more benefits to the middle class. What is even more critical, however, is the need for simplification. This is one of the key elements highlighted by the Finance Minister at the same conference. She stressed the need for making taxation simpler by removing exemptions, as far as possible. This, in itself, she correctly pointed out, would reduce ambiguity and the need for interpretation by tax officials.
In turn, a simplified direct tax code can lead to reducing the huge burden of tax disputes and litigation that has clogged up courts in the country.
On tax terrorism, Sitharaman’s comments were somewhat less than reassuring. She insisted that tax officials have been directed not to pressure assessees just to meet targets. But the effort seems to be to persuade officials rather than to give them a directive on not adopting a punitive approach. And while it is laudable that the Finance Minister herself is going from circle to circle to address commissioners on the issue, surely this is a task that should be undertaken by the Central Board of Direct Taxes. It appears as if the bureaucracy is not inclined to do its job of changing the mindset of tax officials, right down the line. If the government is really in a mood to change its image with both corporate and personal taxpayers, then it needs to take a firm stance with the tax bureaucracy to ensure that there is a sea change in their attitude.
In this context, one must concede that a rather successful initiative has been to increasingly reduce tax officials’ interface with the public by the use of technology. Online tax filing has become a boon for many assessees. Even so, it has been possible for the officials to override the system to ensure that taxpayers need to reach them to seek clarifications. Here again, the Finance Minister’s solution is not ideal. She suggests that those facing trouble should reach out to her office or that of the Revenue Secretary. Realistically, judging by one’s own long-term experience of dealing with top government offices, it is unlikely that any complainant will get through to either her or the senior bureaucrat. The personal assistant is likely to tell the callers that they are in meetings and
neither Sitharaman nor the official will be any wiser. Instead, it would be a good idea to set up a helpline for complaints that can be monitored directly by the Finance Minister’s office.
On direct taxes, therefore, it is probably a better idea to improve the system of tax administration rather than take a short-term view and cut tax rates. While that is bound to be welcomed by the hard-pressed salaried classes in the country, it will lead to a widening of the fiscal deficit that will have to be made up in other ways. Taxpayers need to be given other types of relief in terms of ease of payment and reduction of harassment as well as timely payment of refunds. It is also high time that the old system of income tax raids is eliminated and a new era ushered in where technology and data is used to ensure that everyone is made to pay taxes legitimately.
