Tax revenues forms large part of government revenues. Government budgeted Rs. 16 lakh crore of tax revenues out of revenue receipts of Rs. 20 lakh crore for the year 2020-2021. Government levies and collects taxes in various forms. One common principle that everyone expects in any taxation system is that tax has to be paid by the person who is liable to pay tax. But governments have timely enacted laws and placed burden on persons who are already under tax net, to collect and pay tax on behalf of another person.
TDS/TCS: Widely referred as Tax Deducted at source and Tax collected at source, government has listed some payments and collections on which person making or collecting payment is required to deduct a specified sum and pay it to government, on behalf of another person. Certainly, one who earns income has to pay tax and payer would claim it as expense. But the requirement is opposite here. Requirement to comply with these provisions is largely on medium and big businesses who are making payments for salary, specific services, and also for goods, to small traders or individuals. These serves as dual purpose for government, to keep a check on tax evasion and bringing all such people under tax net.
The list of such payments and collections seems to be growing year by year.
GST Reverse Charge: Under GST, liability to pay falls on the person supplying goods and services. But in some cases, government has asked receiver to pay tax on behalf on supplier. One classic example is goods transportation service. In India, logistics industry is largely unorganized and fragmented. Large number of transporters are truck owners owning one or two trucks. It would be very difficult for government to bring them under tax net and would be more convenient to place liability on service receiver since all the businesses in some way would require goods transport service and sector at large would not escape tax net. Government has listed number of such goods and services on which reverse charge is applicable.
TCS on ecommerce: All the ecommerce operators are required to deduct a specific percentage of sum when making payments to sellers of their network. There are handful of big ecommerce operator like Amazon, Flipkart, etc. while sellers on such network are more than one million. The deducted amount is paid to the government and sellers could claim it as credit against their GST liability. Here, government easily brought all the sellers under tax net just by putting additional compliance to few ecommerce operators.
The form of withholding of taxes is prevalent in many countries given it could really be difficult to collect taxes from the one who is liable to pay tax at times due to various reasons. But to what and how far these laws should go, is a big question.
A number of recent measures have brought lot of people under the tax net, both direct and indirect tax. But if the government keeps rewarding people who comes under tax net with more compliance, I’m not sure how effective these measures would prove in longer run.
Can higher compliance by taxpayers be a substitute of effective tax administration?
Disclaimer: All the text mentioned here purely contains views of the author and author welcomes other opinions.