Tax Terror Or Transparency?

Critics of the Narendra Modi government (there is no dearth of them) have repeatedly raised two issues. The first is that Modi hoodwinked voters when he promised “Minimum Government and Maximum Governance” during the Lok Sabha elections in 2014. Even Right wing ideologues like Arun Shourie, who presided over disinvestments in the Atal Bihari Vajpayee government and was a Modi supporter in 2014, slams him on this issue. The other issue is that the Modi regime is too authoritarian for the good health of Indian democracy. This debate rages on.

But the last Union Budget has added more fuel to the fire. Some provisions of the Finance Bill have triggered claims that Union finance minister Arun Jaitley was bringing back the worst days of “tax terrorism”. Many tax experts contend that the tax man had indeed, been given sweeping powers by the Finance Bill. Says chartered accountant Abhishek Kumar, “On the one hand, we are seeing a move towards more transparency through e-filing of returns and a lower level of arbitrariness. On the other, there are these provisions that encourage corrupt tax officials to harass tax payers.”

Earlier, tax authorities had to provide due cause to citizens before raiding their homes and offices for “undisclosed” income. The clause often led to protracted legal battles in which the actions of tax authorities were questioned and struck down. The Finance Bill stipulates that a tax “inspector” no longer needs to provide a reason for a raid, either to the person being raided or to judicial bodies. This provision will be effective with retrospective effect from as long ago as 1962. Moreover, the assessing officer can now raid charitable trusts without the formal approval of senior income tax officers.

Properties of those raided can be attached and frozen for up to six months, without any recourse to judicial intervention. According to Kumar, like most government and enforcement agencies, the income tax department too has rogue elements who will use these provisions for extortion and corruption. Previously, citizens who felt they were unfairly targeted by tax authorities had recourse to judicial intervention. That has become a grey area in the Finance Bill.

“An assessing officer will have the power to re-open tax returns going back two decades and more and demand answers to queries. This is bound to result in harassment if the income tax officer is corrupt,” says Kumar. He admits to a flip side of the controversy. Too many Indians either “avoid” or “evade” paying income tax. Statistics confirm this unequivocally. Just about one per cent of Indians pay income tax, even though close to four-crore citizens file returns. Anyone who has travelled across cities and small towns of India knows that too many millionaires have somehow, managed to not pay income tax.

Says lawyer and chartered accountant, Shankar Nanda, “You will find owners of small paan and cigarette kiosks, not to speak of restaurants, who earn more than Rs 1 crore a year. But they never pay income tax”. The 2016 Economic Survey had revealed some tell-tale numbers. Less than 2.5 million Indians paid income tax while declaring income in excess of Rs 10 lakh a year. But close to three million Indians purchased cars. More than 22 million Indians use credit cards.

The tax to GDP ratio in India is a poor 17 per cent, notwithstanding repeated attempts by successive governments to expand the tax bracket. China reports a tax to GDP ratio of more than 25 per cent, while developed economies have tax to GDP ratios in excess of 30 per cent. Most Indians, including the poor and those in the lower-middle income bracket, suffer the taxes imposed on a whole host of services. And yet, overall tax revenues do not reflect the growing prosperity of the Indian middle class. Most analysts contend that India needs to get to a tax to GDP ratio of at least 25 per cent. But that doesn’t seem to be happening.

Some analysts think that the demonetisation drive will lead to better tax compliance in the long run. The 18 lakh people who deposited cash after November 8, 2016 have received e-mails and text messages from the income tax department, asking them to explain the source of the deposits. According to Jaitley, this doesn’t smack of Inspector Raj, as everything is being done online in a transparent manner where income tax officials do not physically interact with citizens. Abhishek Kumar and Shankar Nanda confirm that online interface has indeed reduced the scope for arbitrary behaviour by corrupt officials. They also agree that more Indians need to pay income tax.

But where they, and almost all tax experts disagree, is the empowerment of tax officials to conduct raids without providing due reason. According to them, the direct tax regime needs a bold reform move like the GST, which promises more clarity and transparency when it comes to indirect taxes.

The direct tax regime is still too complicated and has provisions for exemption that encourage both income tax officials and tax payers to play hide and seek. In his last Budget, Jaitley has made no move to change the status quo.