Loose ends in our tax administration

The Economic Survey for 2015-16 released on February 26 has addressed some interesting ideas and issues. One is the examination of India’s fiscal capacity for the 21st century (Chapter 7).

The report concludes that while a simple comparison with other economies of India’s taxing and spending capacity puts it below par, indexing this for economic development shows that India is not below par.

The survey also points out that though in comparison to politically developed nations India ranks lower on tax and public spend, other countries took much longer to strengthen their tax capacity. The survey acknowledges that though 23 per cent of the voting population in India should pay taxes, only 4 per cent does.

What needs to be understood is that the Indian administrative set-up has so far not had any capacity improvement — both in tax collection as well as in spending capacity (in other words, systems efficiency). The JAM (Jan Dhan, Aadhaar, Mobile) initiatives of the Centre are geared towards improving its spending capacity by directly reaching out to people.

Similar serious efforts in a different context have also to be made to collect more taxes.

Both, the Central Board of Direct Taxes (CBDT) and the Central Board for Excise and Customs (CBEC) have so far deployed traditional methods for collecting taxes, allowing non-compliant taxpayers scope to hoodwink the system, and make the actions by the tax departments ineffective, or redundant.

A changed approach, based on identifying debtors rather than the present method of identifying debts, can give better results. All advanced as well as rapidly reforming tax administrations have used data analytics in a big way to increase their tax collection capacity.

In fact, the Indian tax administration is yet to combine its data, which can facilitate data exchange between the Central Board of Direct Taxes and the Central Board of Excise and Customs. This will enable officials to track the taxpayer’s tax liabilities, payments and balances using data in one system.

The report points out that India’s overall tax to GDP ratio is 5.4 percentage points less than that of comparable countries. But what is really important is that tax buoyancy for the fiscal year 2014-15 is 0.6, for both direct taxes and indirect taxes.

This does not augur well for the tax capacity. It basically suggests that we are not able to capture the growth of the economic sectors properly for tax collections; this conclusion will also include deficiency in the tax administration’s working.

The Economic Survey also points out that “nearly 85 per cent of the economy remains outside the tax net”. But that seems difficult to believe. The general understanding is that unaccounted income is anywhere between 30 to 40 per cent.

The conclusions need to be understood in the context of “missing taxpayer” which, it points out, would have contributed about ₹31,500 crore in tax revenue.

These missing taxpayers are the ones who have engaged in small businesses.

For them, a robust presumptive taxation needs to be brought in. Countries such as Malaysia, South Africa, France and Spain have presumptive taxation, which encourages taxpayers to come into the tax net and improves tax capacity.

The survey also points out the near absence of a property taxation regime. It needs to be understood that property tax is a direct tax, with no regressivity, being on the basis of ability to pay.

Developed countries, on an average, collect close to 1 to 3 per cent of the GDP (Canada gets 2.5 to 3.0 per cent, New Zealand and Japan 1.5 to 2.5 per cent) and developing countries, about 0.5 per cent of GDP.

In contrast to other taxes, its administration is relatively simple, economically efficient and captures the benefits of capital investments.

Just because the right to tax is with municipal corporations or local government, it cannot be lost sight of. More money in the hands of the local units can help in developing a better federalism.

Indonesia and the Philippines have undertaken such reform in property tax with vigour. India should follow suit.

The writer is an ex-IRS officer and senior adviser at Deloitte India. The views are personal