Treat industry well to build trust

The core of the trust deficit is the belief that the industry will cheat if not monitored closely

By Author T Muralidharan   |   Published: 12th Feb 2020   12:08 am Updated: 11th Feb 2020   11:54 pm

Finance Minister Nirmala Sitharaman recently stated that “the Centre is willing to do everything in its power to remove the trust deficit between industry and the government …Don’t want a law that treats every business with suspicion”. She said the government was working to remove criminal provisions that relate to penalty and jail terms in the Companies Act. But what is this ‘trust deficit’ and why does it arise?

Trust deficit arises when the government thinks the private sector is willing to do anything for maximising its profit, including cheating the public, government and banks. It has surfaced because of recent developments – rising credit defaults to banks and cases of fraud input credit claims in GST. Hence, the government has concluded that all entrepreneurs must be treated with suspicion. This has resulted in a spate of action by tax authorities which the industry calls ‘tax terrorism’. The core of the trust deficit is the belief that the industry will cheat if it is not monitored closely

Why Trust Deficit

Trust deficit arises from three mistaken notions. The first: “I have seen one, I have seen them all”. This is like saying that a few government officers were caught taking a bribe or giving a large contract fraudulently and so all government officers are suspect. “Painting all entrepreneurs with the same brush” is the first root cause of this trust deficit.

The second is “the solution to every deviation is to make a new rule to fix it”. The logical solution to any deviance is to study the root cause and the prevalence of the deviance. If the prevalence is high, then a new rule is required. The government instead of dealing with fraud entrepreneurs with an iron hand, treats every entrepreneur with an iron hand.

The third is “if the business is not doing well, it is because of the mismanagement of the entrepreneur”. A good example of this is the Supreme Court’s intervention in the telecom industry resulting in a real possibility of Idea-Vodafone business failure. By no stretch of imagination can anyone claim that both these companies were mismanaged.

Painting Same

Why does the government paint every entrepreneur with the same brush? The answer is there is no scientific way to discriminate. For example, if you believe that an entrepreneur doing well today is a “good” entrepreneur, then you will be surprised when you discover that the success has come from shortcut methods or due to crony capitalism. So, there must be a scientifically reliable way to differentiate between entrepreneurs’ methods of achieving success and their compliance record.

Mahatma Gandhi (Young India, Dec 1924) wrote: “Where conventional thought suggests that the ends justify the means, the importance of the means – how we do it – over the ends – what we want to happen– must be emphasised.” We admire success irrespective of the means adopted. And when such a successful person defaults, we are surprised and the government officials are hurt that they have been taken for a ride. This excessive focus on success without studying the entrepreneurial methods has to change.

One way to do it is by measuring and categorising entrepreneurs by their compliance track record. For example, Section 149 of GST Act, 2017, has provided for compliance rating though it is not yet implemented. Compliance rating is the need of the hour and all government departments — IT, GST, PF, ESIC, Labour – must develop models for measurement and implement it. The lack of appreciation by government and society to the “risks” entrepreneurs take is the main reason why the industry is upset with the government. Let’s start with the income tax department.

Systemic Issues

I have resolved many tax issues with the officers of the department. They have a great deal of understanding towards entrepreneurship challenges. So when I mean the I-T department, I mean the “system” and not the officers. Many times, officers have no choice but to toe the line out of system compulsions. I am, of course, excluding the corrupt officers because I don’t want to make the same mistake of “painting everyone with the same brush”.

The I-T department has built an “entitlement” mindset with regard to taxes. For example, it thinks that timely TDS and I-T remittance is their birthright and any infringement of this is a culpable offence on the part of the entrepreneur. This is reflected in the criminal and penalty provisions of the I-T Act.

Nirav Dama of Footcandles Film Private Ltd was found guilty of delaying payment of Rs 25 lakh TDS, deducted by the company in 2009-10. The court refuted the submission that the delay was due to financial losses faced by the company. “TDS is the government amount, it cannot be used for personal purposes by the accused. Therefore, the reason of financial crisis and loss to company of the accused is not sufficient reasonable cause for such failure,” the Additional Chief Metropolitan Magistrate said.

Strange Partnership

The I-T department has never asked who has created the profit from which the tax arises. What is the nature of the relationship between the I-T department and the taxpayer? Is it a customer relationship where the department considers the taxpayer as its customer? No. It is a higher level of relationship – one of a unique partnership. It is a “one way” and “no investment” and “minority” partnership. “One way” because when you make profits you give the department a minority share of 25-30% profit share. When you make a loss, it’s all yours. Of course, the I-T department is generous because it allows you to carry forward the losses! And this partnership comes without investing a rupee!

But this is valid only one way. If you delay TDS payment, you will have to pay 18% per annum interest, penalties and even have to go to jail. The same rule does not apply when the I-T department owes you refund ie, return your money collected by them, back to you.

First, the department (Central Processing Centre) needs six months to review your online submission and hence no interest is payable till the beginning of the next assessment year. Thereafter, the department will take its own time to refund and it may take 2-3 years. And the interest it will pay will be 6%, with no penalties, no punishments. Because at play is the most innovative technique for improving the department’s revenues — delay refund. Pay 6% interest. The taxpayer will now default on the TDS; charge him 18% interest. “The more the department delays your refund, the more money it makes due to interest differential”.

Building Bond

The irony is that the government’s contribution is limited to giving permission to start a company. The entrepreneur has to put his own money, borrow from banks and juggle every minute to make genuine profits. The I-T department is a partner of the business because it gets profit share without investing a rupee. The majority partner’s prime expectation from the minority partner is supportive help when the going is tough and not attack you. The trust deficit will only bridge when the government recognises that genuine entrepreneurs risk all to create wealth and employment and also pay taxes.

(The author is independent journalist and serial entrepreneur)

 


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