The following discussion is largely based on the talk and follow up discussion with Mr. Sibichen K Mathew. He is an Indian Revenue Service (IRS) cadre and working in the Income Tax Department. He is of the belief that the country should abolish all kinds of taxes one day, especially GST which is a regressive tax (i.e. everyone in the population would come under its ambit).
Taxes in India: Case in Point
Taxes originated in the medieval ages with the advent of wars between tribes and nations. To continue their massive war campaigns, every nation used this instrument. Even in India, the origin of tax comes about from the colonial rule and the tradition has continued till date. Historically, it is easy to see why taxes are looked down by the people of the nation as something which is unjust, unfair, and biased.
There are multiple factors as to why we dislike taxes so much. During the British rule, it was a tool of repression. It has been politically and sociologically moulded in the following years leading to its present state.
While in the European nations, taxes have a certain degree of social reciprocity meaning the taxpayer can see the benefit coming back to him. The situation in India is completely different with the general notion on tax being a welfare scheme for the less able. Once you cough out the money, just forget about it. The limited accountability of the government in terms of its expenditure of taxpayer’s money further aggravates this problem.
Once you keep this existing notion in mind and look at tax regulations, it all boils down to simple application of game theory. The penalties are so lax and the chances of getting caught dramatically low, why should one pay taxes. Let’s just follow the norm and evade like a pro.
Income Tax Collection: Now and next
The effective tax base of India is pathetically low. The government’s aim to increase tax revenues and is looking at innovations in the taxing process to achieve its aim. Tax payment, in the language of the IT dept., can be treated as a national good. Like any other good, it follows a supply demand curve. Further introspection shows that the tax revenue should follow the Laffer’s curve.
The objective is to reach this peak, where tax rates are lower than current but the tax base has widened.
IRS has limited resources and must be selective in perusing cases of tax evasion. An implication of the situation is the plethora of amnesty schemes announced every other year.
Here in lies the challenge and a prospective solution in the form of digital payments. The current regulations which stops cash payments above 3 lakhs give a great boost in this direction. This allows the IT Dept. to create a 360-degree profile of every PAN card holder and use non-intrusive and non-invasive methods to keep defaulters at check. A special mention of the PMO office to push these reforms through.
To illustrate the importance of this step, take the net yearly seizures by the IT dept., a miserly figure of 3000. The limited manpower calls for innovative steps to solve this problem. Digitization not only increases transparency, it also brings down the cost of tax collection. Gone are the days of making rounds of IT office, now you can e-file your returns from the convenience of your home or office. This has an added benefit of bringing down corruption by removing the middlemen from the process.
The nation is ready for a leapfrog in the prevailing tax culture. To further strengthen this move, a low rate of tax (say 5%) should also be applied to agricultural income and religious institutions. This would promote transparency and plug the leaks in the tax net which occur via these activities, i.e. the practice of fund transfers into these instruments to evade taxes.