The Challenge of Catching Elusive Taxpayers

Context: Various direct tax reforms have been introduced over the years, but none of them has worked.

Measures taken to Reform Direct Taxation Regime: Widen the tax base and increase tax collections.

• Tax Concessions  (income less than 5 lac is nontaxable): resulted in the rise of tax filers Tackling Black Incomes: 

• Demonetisation: to bring out the black incomes and turn them white so that the tax to Gross Domestic Product (GDP) ratio could sharply rise.
• Special Investigation Teams: setup under the order of the Supreme Court.
• Negotiation of Double Tax Avoidance Agreement: For, E.g. with Mauritius to get back black money held abroad.

• Computerization: 

• The provisions of e-filing and Permanent Account Number (PAN) were introduced to push citizens into filing the honest return.

• Faceless Assessment: Since the government is neither able to trust the taxpayer and the collector, it has handed over the process to a computer. 

• Checks Evasion: Faceless and anonymous ensures that no nexus can be formed between the taxpayer and the o?cial lading to tax-evasion.
• Reorganization of the Department: into smaller units like assessment, verification, review and technical units.

• Honouring Honest Taxpayers: The Vivad se Vishwas scheme was introduced to settle tax disputes.

Failure of the measures taken:

• Drop-in number of taxpayers: The number of tax filers has increased, but the number of taxpayers has dropped due to the tax concessions

• Only 15 million people pay income tax out of a population of more than 1.35 billion.

• Direct tax to GDP ratio is stagnating at about 5.5%.

• Prevalence of Dishonest Taxpayers: 

• 10% of Indians earned 55% of the nation’s incomes, which if honestly would have paid Income Taxes (I-T), leading to I-T to GDP of 18% (2016 report)
• Demonetisation has failed in its objective to bring out black incomes.
• Negotiation under tax treaty has not budged rich taxpayers and even has deterred them from investing due to the alleged fear of tax-terrorism.
• Scheme for honouring honest taxpayers has also failed in its objectives.

• Issues with the faceless assessments system: 

• Possibility of manipulation of software by those who know the system.
• Understaffed Administration: Even if a lot of computerized data are available, it may prove to be inadequate.

• For, E.g. Businessmen declare their entire household expenditure as business costs, which are often fudged through under-voicing and requires human vigilance.

• Unfair Lamenting of the Rich: The well­o? who have gained the most complain of high taxes and controls, and the poor live with injustice.

• The highest tax rate has been brought down from 97.5% in 1971 to 30% (plus surcharge) now.
• The controls and regulations were sharply curtailed – the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act were removed.

Conclusion: Declining Trust: There is massive alienation in society. The pandemic also points to this – the way vast numbers have su?ered and why they do not heed to the authorities.