India has a very low tax-to-GDP ratio of around 18% that is among the lowest in the world. In advanced countries, the tax-to-GDP ratio is higher than 35% and, in some cases, it exceeds 40%. In such countries, the government is able to provide good infrastructural support in normal times and basic support to citizens during crises such as the coronavirus pandemic that the world is facing today. The turn current world where the geo-politics is Asia-centric, larger allocations need to be made for defence, health, sanitation and education.
The most important question is as to why the tax-to-GDP ratio is so low in India. The obvious answer is that tax compliance is very low, and tax exemptions are given to specific sectors of the economy. Why is this so? Is there anything to be learnt from other countries, especially the advanced ones? Will the carrot and stick policy work if India wanted to raise tax collection? These are complex issues that have already been addressed in some countries.
Tax compliance has remained a key issue in India, especially when because the menace of black money is so widespread and deep-rooted. In a population of 1.3 billion, there are just about 1.5 crore Indians who pay income tax, according to the latest reports. This accounts for a little over 1% of India’s population. This number has shrunk sharply in the last one year. The number of Indians who paid income tax fell from 3.29 crore in assessment year 2018-19 (financial year 2017-18) to approximately 1.46 crore in 2019-20 — a fall of 55%. This is too low a number for a country that has numerous luxury homes and fancy cars. India is also the world’s largest gold importer and has a booming stock market.
Currently, the most crucial issue is how to increase tax compliance. In the literature on public finance, every economist and public policy analyst agrees with Adam Smith on the canons of taxation that emphasise on equality and convenience. Taxpayers should be paying taxes according to their capacity and conveniently. In the US, compliance is high and a study by the treasury in 1996 concluded that audits had a strong deterrent effect on the general population. But opinion is divided and a number of studies conclude that punishment leads to resentment, hostility and minimum compliance.
On other hand, most experts are unanimous and suggest that rewards lead to higher tax compliance. Professor Rosenberg of University of San Francisco suggests lower tax rates while Professor Kornhauser of Arizona State University proposes special reward schemes for individuals. Others have suggested perks for honest tax payers like reduced public transport fares and free admission to museums and cultural events. Some suggest tax-compliance certificate that can help a firm build its public image, while others want to make tax certificates mandatory for some types of licences.
In India, there is a need to have a framework, where good tax behavior is celebrated and tax avoidance is punished. The tax administration needs to be strengthened to avoid rent-seekers. To improve tax collection, there is a need to create a conducive tax administration by:
- Incentivizing tax collection and tax intelligence agencies,
- Electronic surveillance through technology upgradation,
- Quick settlement of disputed cases, and
- Ensuring equity, certainty, convenience and simplicity in taxation.
In order to promote growth and investment, the government had brought in tax reforms through the Taxation Laws (Amendment) Ordinance, 2019. Starting from the Finance Act, 2016, the corporate tax rates were gradually reduced, while phasing out the exemptions and incentives available to the corporates. In furtherance of this policy, a concessional tax regime of 22%, with global benchmarks, has been provided for all existing domestic companies from FY2019-20, if they do not avail any specified exemption or incentive. Further, such companies have also been exempted from payment of the minimum alternate tax (MAT).
In order to reform personal income tax, the Finance Act, 2020 had provided an option to individual taxpayers for paying income tax at lower rates if they do not avail specified exemption and incentive. To increase the attractiveness of the Indian equity market and to provide relief to a large class of investors in whose case dividend income is taxable at the rate lower than the rate of DDT, the Finance Act, 2020 had removed the dividend distribution tax under which the companies shall not be required to pay DDT with effect from April 1, 2020. The purpose was to simplify the tax regime.
To address the need of resolution of pending tax disputes, steps were taken to ease the compliance for taxplayers. Direct Tax Vivad se Vishwas Act, 2020 was enacted on March 17, 2020, under which declarations for settling disputes are currently being filed. The E-assessment Scheme, 2019 had eliminated the interface between the assessing officer and the assesse, optimising the use of resources through functional specialisation and introducing the team-based assessment. The Finance Act, 2020 has empowered the central government to notify faceless appeal scheme to eliminate human interface in the appellate function of the department between the appellant and the commissioner of income-tax (appeals).
To bring efficiency and transparency in the functioning of the income tax department, every communication of the department will now mandatorily have a computer-generated unique document identification number (DIN). Pre-filled income tax returns (ITR) have also been provided to individual taxpayers to make tax compliance more convenient. Start-ups have been provided hassle-free tax environment that includes simplification of assessment procedure, exemptions from Angel-tax, constitution of dedicated start-up cell. The threshold for launching prosecution has been substantially increased.
To effectively reduce taxpayer grievances/litigation, the monetary thresholds for filing of departmental appeals have been raised from Rs 20 lakh to Rs 50 lakh for appeal before ITAT, from Rs 50 lakh to Rs 1 crore for appeal before High Court and from Rs 1 crore to Rs 2 crore for appeal before Supreme Court. The purpose was to rationalise the tax administration system.
Measures have also been undertaken to curb tax evasion. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the Black Money Act) has been enacted to curb the flow of black money stashed abroad. The Benami Transactions (Prohibition) Act 1988 has been comprehensively amended by the Benami Transactions (Prohibition) Amendment Act, 2016 to enable confiscation of benami property and prosecution of benamidar and the beneficial owner.
For widening the net of tax deduction at source and tax collection at source, several new transactions were brought into its ambit. In order to facilitate the digitsation of the economy and to reduce the unaccounted transactions, various measures have been taken that include reduction in rate of presumptive profit on digital turnover, removal of MDR charges on prescribed modes of transactions, reducing the threshold for cash transactions and prohibition of certain cash transactions.
In order to effectively tackle the issue of non-taxation of the profits generated by non-resident digital companies, India had introduced the equalization levy @ 6% on online advertising revenue as an interim measure in 2016. Amendments have also been made in form 26AS of the Income-tax Rules, 1962 (the Rules).
In view of the challenges faced by taxpayers in meeting the statutory and regulatory compliance requirements across sectors due to the outbreak of the new coronavirus pandemic (COVID-19), the government has taken various measures pertaining to direct taxes to support businesses and individuals.
The government has made continuous efforts to improve tax administration and ensure higher tax compliance. The pandemic is a setback, but an increase in the number of taxpayers as well as tax collections can be expected when economic conditions improve. Then, tax rewards like credit points could also be considered for honest and responsible citizens.
(Dr Charan Singh is CEO and director of EGROW Foundation, a Noida-based think tank. Views are personal)