Tax Compliance

Why in news?

Finance Minister while addressing the annual meeting of CII observed that some tough steps are necessary to make India a tax-compliant society.

What does statistics stay?

• Finance minister mentioned that of the 4.2 crore persons employed in the organised sector, only 1.7 crore filed returns.
• Similarly, of the 5.6 crore individual enterprises and firms operating in the informal sector, only 1.8 crore filed their returns.
• Finally, out of 13.9 lakh companies registered in India, only 6 lakh companies filed their returns; of which 36,448 showed profits above Rs 1 crore.
• This statistics defies logic in a country which boasts of luxury villas, expensive cars, rising gold imports, a booming stock market, significant rise in international travellers, and ever-increasing high net worth individuals.

What is the hindrance at present?

• The FM is correct in pushing for higher tax-to-GDP ratio.
• However, given that 30 % of population is poor, 28 % is illiterate, 8 % is above 60 years of age, and nearly two third of the population is dependent on tax-free agriculture income, direct tax collection is expected to be rather benign.
• In the US, tax compliance is high and ascribed to strong deterrent effect of selective, intensive audits.
• But punishment leads to resentment, hostility, avoidance and minimum compliance and, therefore, should be avoided.
• In sharp contrast, rewards could be more effective in motivating people to pay tax dues.
• Rewarding honest behaviour, not coercive actions, can go a long away in bringing more people into paying taxes.

How the tax compliance can be increased?

• The reward system could help in increasing the compliance mechanisms.
• Some of the rewards suggested are special schemes like faster access to special phone lines with shorter wait; or reduced public transportation fares; free admission to museums and cultural events.
• Also suggested are measures like providing tax-compliance certificates to firms to help them build an image; and making tax certificates mandatory to renew certain licenses.
• Japan, for instance, offers to have your picture taken with the Emperor if you were found to be honest.
• The Philippines puts your name in a lottery if you were found to be compliant with VAT.
• South Korea considers allowance to airport VIP rooms, and free parking in public parking facilities.
• In Finland, targeted tax incentives have been used to significantly influence taxpayer behaviour through tax credits which can be used for different purposes, including nursing homes.
• In India, good financial behaviour needs to be celebrated publicly.
• Illustratively, in every commissionairates of direct and indirect taxes, a public reward ceremony could be conducted.
• Other incentives could include special privilege in government-operated hotels, hospitals, and airlines; preference in awarding government contract; bonus points for children in admission to government institutions etc.
• There is also a need to create trust and cooperation between citizens, corporate/business sector and the Government.
• At present the general perception is mutual suspicion among all three.
• Poor public infrastructure cannot compel high tax compliance.
• Finally, the Government and private business believe that citizens are illiterate and, therefore, can be ignored.
• This fear of each other has only been increasing over years despite the change in political regime.
• The Government could consider, on lines of agricultural/crop insurance, instituting an insurance scheme for business tax payers especially those from informal sector which would provide financial support in times of distress.
• According to global research, women are considered more tax compliant than men; but unfortunately, not in India.
• To improve tax collection there is need to create a conducive tax administration.
• This would imply a) incentivising tax collection and tax intelligence agencies, probably with higher allowances and compensation; b) electronic surveillance through technology up gradation; c) quick settlement of disputed cases; and d) ensuring equity, certainty, convenience and simplicity in taxation.
• To support creating conducive tax administration there is a need to introduce academic courses on ethics and business practices for business graduates, chartered accountants.

Source: The Hindu