Finance Minister Arun Jaitley, while addressing the annual meeting of CII in Delhi on April 28, observed that some tough steps are necessary to make India a tax-compliant society. Earlier, in his Budget speech, Jaitley had presented some startling facts. He 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 ?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 networth individuals.
The FM is correct in pushing for higher tax-to-GDP ratio. However, given that 30 per cent of population is poor, 28 per cent is illiterate, 8 per cent 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.
How to increase tax collection? 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.
Global best practices
The reward system could vary in different economies and situations. 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. Honest tax payers can have a privilege of a picture with Governor of the state or even the President of India. 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.
Air of mistrust
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. The Government and citizens suspect that corporate business is dishonest and accumulating profits at their cost. The private sector and citizens suspect that the Government does not use their tax collection for general welfare of the society and taxes are wasted.
In fact, in advanced countries, high tax collection and excellent public services reinforce each other. 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 recent episode of demonetisation has, in fact, resulted in clear demarcation of the rich versus the poor. The class war, nay divide, is not very useful for creating mutual respect for different economic actors in the country, because each one is essential for an efficient economy.
There is still another fear, mainly among small businesses, that in the absence of social security, in times of financial stress, there is no insurance cover. The businesses, especially in informal sector, have to be self-dependent and, hence, they save on taxes. To address this insecurity, 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.
There is also a need to investigate other factors that strengthen tax compliance. According to global research, women are considered more tax compliant than men; but unfortunately, not in India. Logically, it can be deduced that in a country where females are not secure at work places compulsion of tax compliance would generally be weak.
Need conducive administration
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 upgradation; 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, company secretaries, auditors and legal experts.
It is difficult to have an oasis of honest financial behaviour in the midst of general atmosphere of dishonesty in non-financial matters. Higher tax collections are beneficial for the society, and therefore, different agencies of the society such as the entertainment industry, social media, community leaders and non-government agencies should together contribute to strengthening ethical behaviour in the society — tax compliance simply reflects general social norms.