Trusting Taxpayers

Context: The recent adoption of taxpayer charter and a mechanism of faceless scrutiny is a big step towards building trust in the tax administration and should not just remain on paper.

Positives of the move: Building the trust through

• Setting the standards: With the adoption of the charter, India joined a select group of countries such as the US and Canada that have such provisions in the law.

• Provision of complete and accurate information

• Reducing compliance costs

• Giving a fair and just system: 

• Reduced harassment: adoption of faceless assessment and scrutiny is aimed at reducing the harassment of taxpayers because cases will be allotted randomly to officials in different parts of the country.

Issues with the tax system:

• Lack of consultation and resources: A large number of tax officials see problems in the lack of consultation and inadequate resources.

• Fear of reduced tax collection would increase pressure on officers to meet tax targets somehow.

• Government’s Fault: By setting over-ambitious revenue targets, prompting tax officers to adopt harsh measures to meet them.

• Reduced Tax Collections:

• Due to faulty Tax policies: The government in 2019 doubled the exemption limit for income tax to Rs 5 lakh which allowed the majority of taxpayers to move out of the tax net.  

• Tax Evasion: By Increasing the marginal rate of tax for the high-income groups could result in tax evasion.

• Low Tax Base: Salaried taxpayers, on average, paid about three times the income tax that self-employed ones did. – Late Arun Jaitley.

Way Forward:

• Striking a balance: The tax administration should aim to strike a balance and collect a small amount of tax from a wider base of taxpayers.  

• Use of technology and Big Data to widen the tax base, which will also strengthen compliance.

• Training the tax officer: because the focus needs to shift from merely raising tax orders to supporting taxpayers and truly streamlining assessments.