Prime Minister Modi on August 13, 2020, launched the platform for ‘Transparent Taxation – Honouring the Honest’ aimed at easing compliance and expediting refunds, benefiting honest taxpayers. The platform’s three main features are faceless assessment, faceless appeal and taxpayers’ charter. The focus is on making the tax system people-centric and public-friendly. “Banking the unbanked, securing the unsecured, funding the unfunded and honouring the honest,” the PM said.
According to Modi, the four factors responsible for changes in the taxation system were policy-driven governance, belief in people’s honesty, use of advanced technology and efficiency in bureaucracy. The government introduced faceless I-T assessment to reduce corruption and overreach by officials. These announcements are revolutionary. In a two-part series, we will explore the challenges in the implementation of this idea at both taxpayer and tax department levels, for both direct and indirect taxes.
Compliance in Direct Taxes
According to a tweet from CBDT, on Feb 13, 2020, the statistics on returns filed for the financial year 2018-19 showed only 14.6 million (25%) people paid income tax of the 57.6 million who filed their returns. Only about 2,200 doctors, chartered accountants, lawyers, and other professionals disclosed annual income of over Rs 1 crore from their profession, excluding other incomes like rental, interest, capital gains, etc.
Researcher Anirudh Tagat in an English daily on Feb 14, 2018, wrote: “Studies in social psychology and behavioural economics suggest that lower trust levels, in turn, result in dishonesty. Thus, with an increase in enforcement powers, trust in government and tax authorities goes down, and there is a conducive environment for individuals to be dishonest in reporting their income on tax returns”. Clearly, the approach till date is on creating deterrents for tax evasion. But this has not worked well.
Compliance in GST is measured primarily by filing of returns GSTR-1 and GSTR-3B. As per GSTN data, GSTR-1 compliance in April 2020 was only 24% while the same for June 2020 was only 15%, mainly due to Covid exemptions. The GSTR-3B compliance – on time filing – during July 17 till Feb 20 stood at around 70% but reached 88-90% after a period of time. While GSTR-3B on time compliance is understandable because this return can be filed only after the GST dues are paid, the delay in filing of GSTR-1 is inexplicable. The current approach of cancellation of registration is not a great idea because then the taxpayer goes out of the radar.
The old concept of tax collection tag should be replaced with Tax Administration. The collector tag is a colonial or a sovereign hangover. The assets are not owned by a sovereign but by the people of India or by every citizen of India. But, both the taxpayer and collector have continued their old ways for the last 70 years. The taxpayer collected for the new sovereign government and the taxpayer was conditioned to evade it or avoid it.
Let’s lay firm two important facts – first how important is tax collection to government budgets and second, how important is the government budget for running our nation. Analyses of the 2019-20 budget establish that the total gross tax collections of Rs 24.6 lakh crore are equal to 88% of the total Central government expenditure of Rs 27.9 lakh crore. 67% of the Centre’s revenue is dependent on tax compliance of individuals and enterprises.
The government gets most of its revenue by taxing citizens, corporations, goods and services. 99% of the gross tax revenue depends on tax compliance. 67% of the revenue collected goes to the central pool while 33% goes to the State pool. So both State and Central cannot function without timely collection of taxes.
As for the government spend of its budget of Rs 27.9 lakh crore, 19% goes to defence and home affairs, 5% to education and public health, 12% towards subsidies on food, fertilizer, petroleum, etc, 9% to rural and farmer welfare, 26% towards establishment costs of Central government, including pension, and 24% towards interest. So without government spend, there is no defence, no law and order, no community welfare. Tax collection, and hence tax compliance, is too important to be left to tax collectors.
We need an alternative approach to promote compliance and a new mindset at both taxpayer and department levels, for recognising transparency and rewarding compliance. It is also time we added compliance as a separate fundamental duty.
Timely, unilateral and full payment of tax dues (hereafter ‘tax compliance’) and following the rule of law are essential in a democracy. Unfortunately, the necessity for tax compliance has not been adequately emphasised in the Constitution. Fundamental duties were added to the Constitution by 42nd Constitutional Amendment in 1976 and 86th Constitutional Amendment, 2002. Eleven duties are specified. While following the rule of law is stated as duty no. 1, tax compliance is subsumed in rule of law adherence.
Tax is not an entitlement of tax collectors but the duty of every citizen because we are paying to benefit and protect ourselves. Hence, evasion is a crime like terrorism or treason. On the other hand, tax collectors must recognise that tax becomes due only due to the sweat and toil of those who run enterprises. For example, income tax is due only when revenue is earned and when the revenue is higher than the cost. Similarly, GST is a tax on supply and consumption. This requires a lot of things to be managed like logistics, manufacturing, financing, people and compliance.
New Mindset at all Levels
• Where honest taxpayer invites tax administrator to his home as a friend for a cup of tea with respect and affection
• Where tax administrator invites honest taxpayer for a cup of tea to his office like he would invite a customer
This is unthinkable today because the reverse is happening:
• When tax collector visits the home of taxpayer, the latter tries to destroy the evidence
• Tax collector forces taxpayer to visit his office, tries to use all his intellect to crucify the taxpayer
Mahatma Gandhi, in a speech in South Africa in 1890, said: “A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him”. However, the citizens also must own up the duty to pay taxes and report on tax evaders.
— To be concluded
(The author is Chairman, TMI Group)
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