There has been a long held view that Indians are not used to paying taxes fundamentally because the tax rate is too high and that acts as a deterrent. This could have been true for a while when in 60s, the maximum marginal rate of income tax was a high of 90%. But, to argue that this is the sole reason for people not paying taxes would be travesty of the truth. The proof of pudding is in the eating.
Ever since the process of economic reforms and liberalization started 25 years ago [1991], the income tax rates – both personal and corporate – have progressively come down. Today, the maximum marginal tax on personal income @30% is significantly lower than most of the developed countries and some developing countries too.
Yet, if India has less than 50 million income tax assessees in a population of 1250 million or a mere 4%, this speaks volumes about a deeply entrenched habit of not paying taxes [irrespective of the prevailing rates of taxation]. This is also very much in sync with proliferation of black money in India – stashed abroad as well as staying within. No wonder, a lot of time of the present government is consumed in tackling this menace.
To get an idea of how deep a tendency to dodge the tax authorities has got impregnated in our ethos [like traces of cancer in all blood vessels in the human body], sample this. In the context of the Income Declaration Scheme [IDS] now available under a 4 month window [June 1 – September 30, 2016] whereby a person can declare his un-disclosed income and assets and pay tax, penalty and surcharge @30%/7.5%/7.5% or a total of 45%, one of the questions asked is:
Can a person use un-disclosed income to pay tax [plus penalty and surcharge] on the income disclosed by him/her? This question [symptomatic of the thought process of millions of tax evaders] itself reflects a perverted mindset whereby even while availing of a facility to condone a wrong committed in the past [read evasion], the person is hell bent on paying less than what is due as per law. To comprehend its nuances, let us take an example.
An evader declares an undisclosed income of Rs 100 crores. Under IDS, he is expected to pay Rs 45 crores [45% of 100] towards tax, penalty and surcharge. Now, he wants to use Rs 45 crores of additional [albeit] un-disclosed income to discharge the liability on the declared amount. The question arises if he has un-disclosed income of Rs 145 crores, why does he want to declare only Rs 100 crores?
If, the tax authorities were to concede his request, he would have paid tax [plus penalty plus surcharge] of Rs 45 crores on a total un-disclosed income of Rs 145 crores. In other words, he would have ended up reducing his effective liability to 31% [45/145] as against 45% as per the provisions under the IDS. This would be even lower than the rate applicable to an honest assessee.
This was one of the questions addressed by the CBDT [Central Board of Direct Taxes] in the FAQs [frequently asked questions] list. The Board has emphatically answered this in the ‘negative’. It has held that the un-disclosed income of the person in the instant case will be taken as Rs 145 crores – rightly so – and he will have to pay 45% on this or Rs 65.25 crores towards tax, penalty and surcharge.
This together with issue of a host of other clarifications under FAQs should help in setting the record straight and eliciting a good response to the scheme. This is all the more when we look at the penalty of up to 200% [in addition to 30% tax plus 7.5% surcharge] and imprisonment of up to 7 years for those who do not avail of the scheme. But, habits die hard especially when, these have taken deep roots.
The government will therefore, have to proactively engage with those who do not come forward to declare their un-disclosed income. It is encouraging to note that IT department has information on about 1 million persons who spent up to Rs 10 million in an year. Based on this, it is sending out e-mails to them starting with persons expending Rs 10 million followed by those spending Rs 5 million.
The intent behind this move [albeit subtle] is to put some psychological pressure, letting them know that the authorities are in the knowledge of their un-disclosed income/assets and despite this, should they decide not to declare, this could plunge them in to much bigger trouble ahead. Surely, this strategy would work but, there is no room for complacency.
Post-September 30, 2016 [last date of declaration under IDS], the government should vigorously pursue all such cases. This is necessary as the potential is unprecedented. If, a person can spend Rs 10 million in an year, without doubt, his earnings would be 10 times more. Even assuming a very modest income of Rs 10 million, the tax @30% alone would be Rs 3 million. For 1 million persons, this would be Rs 3 million million or Rs 300,000 crores.
The government should not let it remain a one time exercise only with an eye on making the IDS a success. The information gathering and surveillance fully leveraging the IT [information technology] network should get institutionalized within our governance set up. Armed with this data bank, the authorities should do the follow-up to garner taxes legitimately due to the department.
Even in the area of indirect tax [excise, customs, VAT etc], there is monumental loss of revenue as transactions in tens of thousands crores go un-reported. All of these can come on the tax radar with the implementation of Goods and Services Tax [GST]. Hopefully, the constitution amendment bill will get passed in the current session of parliament and we will have GST in place from April, 2017.
Though GST is unambiguously an improvement over the extant dispensation, there is no room for complacency here also as tax evaders [especially die hard] can always find loopholes even in laws that are intrinsically impregnable. The tax administration will have to remain on high alert to ensure that no transaction goes off the GST radar.
Having started on a promising note, hopefully Modi – government will succeed in destroying the cult of people not paying taxes thereby garnering resources needed for boosting development and fulfilling social welfare needs especially of the poor.