We always noticed that during every return filing season the newspapers are flooded with advertisements by income tax department reminding, requesting & warning you to file your returns, pay your taxes and refrain from any tax evasion.
Over the past couple of years, India’s leaders have raised the issue of tax evasion & the need to widen India’s tax base over and over at various forums.
The government’s intentions are loud and clear through its reforms too, whether it be big bold moves like demonetisation, GST, cashless economy, mandatory linking of PAN with Aadhaar or as simple as the new one-page ITR-1 (Sahaj) to ease the return filing process for salaried individuals.
Undoubtedly the problem is one worthy of all the attention. Ours is a largely tax non-compliant society. If we take an example of FY 2015-16, out of the total population of 130 crores, only 3.7 crore individuals filed income tax returns. Of these, only 76 lakh people showed income above Rs.5 lakhs and amongst them, 56 lakh were salaried individuals. The numbers don’t flatter much because salaried individuals cannot easily evade taxes as every month a certain amount of TDS is deducted from their earnings anyway. Hence, they have to disclose their true income. It is the businessmen & professionals who are the biggest evaders. And we must not only think about direct taxes, businesses evade indirect levies (say customs) through a number of manuevers.
Not just individuals, companies, trusts & other entities don’t report or under report their true income through manipulation of accounts and by use of shell companies.
The answer is simple – because they can! The existing legal & administrative framework is ineffective in identifying & punishing tax evaders. Besides, a large part of the Indian economy is unorganized and involves heavy use of cash transactions, which do not leave audit trails. This provides an easy outlet for people to park their undisclosed income (mostly in real estate, jewellery, hotels, retail and betting).
Also, the popular mindset is such that there is an acceptance of tax evasion as ‘normal’. Most people just don’t want to pay taxes even though they have legitimate income. Some, however, cannot disclose their true income or its true source. These are the people who have inflows from crime, bribery or other unlawful activities. They don’t mind giving away a third of their illicit income in taxes but are afraid of being imprisoned for having carried out illegal activities.
According to ‘A Study on Widening of Tax Base and Tackling Black Money‘ published by FICCI in February 2015, widening of tax net helps in achieving higher tax to GDP ratio, achieve fiscal consolidation, meet the targeted tax collection and reduce the shortfall in tax collection with budget estimates.
Further, it helps the government to undertake planned investments in infrastructure and other important areas for growth & development.
Above all, it will shift the revenue pressures from honest taxpayers. If everybody started paying their fair share of taxes, there is a strong possibility to reduce the direct and indirect tax rates in the future. If the opposite happens, even the honest persons will be forced to resort to tax evasion.
Consider this success story of the state of Maharashtra. Due to improved IT infrastructure, the Maharashtra VAT department was able to identify the dealers that merely existed on paper and were only issuing fictitious invoice (also known as Hawala Dealers). The customers were claiming credit on the strength of such fictitious invoice and utilised to discharge their tax dues. The State department cross verified the sales submitted by such Hawala Dealers against the corresponding information of purchases shown by the other dealers.
Overall, before taking big bold reforms like demonetisation, the government must first address the underlying structural issues in the revenue collection machinery. It is not difficult to ensure compliance if people know that the government is watching them closely. An able and highly efficient revenue department should be the first priority.
(Republished with Amendments)