By Hardayal Singh, Income Tax Ombudsman, Mumbai
Article
Both tax administrators as well as tax professionals —
Chartered Accountants, Advocates and other experts — are often so pre-occupied
with their day-to-day concerns that they sometimes have little time to study the
environment in which they are functioning. The present article seeks to provide
some information in respect of the latter.
Certain trends in collection of direct taxes in recent times
reflect an important change in the macro-economic environment in which we all
function and deserve some thought. The good news first : One feature of the
pattern of revenue in recent times is the much heavier reliance now placed by
the Central Government on direct taxes — personal income-tax and corporate tax —
to meet its revenue yields. The current composition of revenue is now much more
reflective of the revenue composition of a developed country. This is in marked
contrast to the situation which prevailed in the country about 12 to 13 years
ago. During the year 1995-96, direct taxes accounted only for 30.2% of the
revenues of the Central Government. The current figure for 2007-08 is 48.8%.
During the year 1995-96, customs and central excise duties were the mainstay of
the central finance — accounting for 32.1% and 36.1%, respectively, of the
revenue receipts. In the year 2007-08,
these figures declined to 18% and 23.8%, respectively.
The decline in the reliance on indirect taxes cannot but be
good news for the economy, for the efficiency and distortion losses from such
taxes are well known and are generally much greater than those from
income-taxes. The latter do not have a cascading effect which a tax on tax
generates. Income-taxes also do not distort to the same extent, the natural
choices of consumers and producers. One can only hope for the sake of the
healthy development of our economy that this trend of progressively greater
reliance on personal income-tax and corporate tax will continue.
Up to and including the financial year 1995-96, income-tax
and corporate tax raised by the Income-tax Department were more or less equal.
During the year 1995-96, revenue from personal income-tax stood at Rs.15,592
crores and that from corporate tax at Rs.16,487 crores. The growth of these two
taxes till this year was more or less on par in that the ratio of 1 : 1 was
being consistently maintained from year to year.
There has been a sea change since then. As a percentage of
gross tax revenues of the Central Government, personal income-tax has increased
between 1995-96 and 2007-08 from 14.0% to 18.1%. During this period corporate
tax more than doubled from 14.8% to 30.7% of the Centre’s tax revenues. As a
percentage of GDP, personal income-tax has increased from 1.3% to 2.1% of the
GDP. Corporate tax on the other hand has increased from 1.4% to more than 4% of
the GDP. The growth of corporate tax is thus, by any indicator, far more rapid
than personal income-tax. This phenomenon has important implications not only
for the tax administration, but the entire economy.
What it appears to imply is that the level of voluntary
compliance insofar as corporate tax is concerned is much better than in the case
of personal income-tax. The current ratio of personal income-tax to corporate
tax of 7 : 12 is heavily skewed in favour of corporate tax. Compare this with
the United Kingdom where in the year 2004-05, corporate tax accounted for
receipts of 34.1 billion Pounds and personal income-tax for receipts of 127.2
billion Pounds. The ratio between personal income-tax and corporate tax was thus
3.73 : 1. Considering the magnitude of corporatisation in the two countries, one
would imagine that the revenues from personal income-tax in India too should be
far greater than corporate tax. What policy makers need to ponder over is why
the ratio between the two taxes is so heavily biased now in favour of corporate
tax. One inference that can reasonably be drawn is that the collections from
personal income-tax are far below potential.
The explanations for this phenomenon are not far to seek :
the culture for voluntary compliance amongst non-corporate entities in India is
still very weak. People still do not perceive any great advantage in paying
taxes, possibly because they cannot see getting back any benefit from doing so.
Even more so, they do not see anything morally wrong in evading taxes if they
can get away with it; if they find that others, equally placed, are doing so
successfully without coming to any harm; or if they perceive complexities in the
system, too daunting to handle.
Future thrust of policy planning should surely be in the
direction of finding ways of making ordinary people see the advantages of paying
taxes. This would involve a twofold strategy : in the first instance, they must
be able to perceive that it would be difficult for them to get away in case they
do not pay taxes according to law. Strengthening the third-party reporting
system (AIR) would definitely help in this regard. Secondly, and even more
importantly, it is important to undertake taxpayer education on a larger scale
than ever before to make the taxpayers realise the advantages of voluntarily
complying with the law.
At the level of the cutting edge, a taxpayer must also want
to deal with the Tax Department and not shy away such a course of action. In
concrete terms, this would mean that the Tax Department itself would need to
work on improving the attitudes of its officials towards the taxpaying public. A
climate in which scrutiny assessments are made in a much less threatening
environment would perhaps need to be created. One possible way to achieve this
objective would surely be to prescribe a limit on the number of times a taxpayer
can be called for making a routine scrutiny. The officer’s discretion to call
for information should also not be open ended, but severely circumscribed
inter alia by the reasons for which the computer system has selected the
case in the first instance. In other words, it should not ordinarily be open to
the officer to launch fishing inquiries into areas which are beyond the reasons
for selection.
The direct taxes to GDP ratio has improved appreciably from 2.8% to well over 6%between the years 1995-96 and 2007-08. The overall taxes to GDP ratio of the Central and State Governments, put together, however, is still very low at about 15% to 16%. To bring this ratio and particularly that of direct taxes to GDP on par with developed countries, considerable modifications in polices, along the lines indicated above, would be required.
