Sucheta Dalal :The means and end of generating more tax revenue
Sucheta Dalal

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The means and end of generating more tax revenue  

Dec 18, 2006

The government’s decision to revive the Income Tax Ombudsman scheme that had existed in the 1960s is an excellent move that will give diligent taxpayers the ability to protest against undue harassment. As it is, the UPA government’s frequent threats of increasing tax compliance through increased raids, when known evaders go scot-free is a constant source of annoyance. Honest tax officials are equally frustrated at corrupt colleagues snapping up interesting and ‘lucrative’ postings and deputation assignments; they too are likely o welcome some public appraisal in the form of complaints to the Ombudsman.

An official reacting to criticism against the tax administration says, “One of the lessons that I learnt in my stint in systems is that it requires not only modernisation of equipment /facilities but also of processes and above all of mindsets - both of tax administrators and tax payers. Both will have to drop adversarial mindsets inherited from colonial times. That’s a long drawn behavioural change process. Contrary to stereotypes of tax administrators, there are some of us who are as concerned about public good and public service as any other set of citizens of this country.

Today, the perception gap between administrators and taxpayers seems rather wide; but it is worth presenting both sides of the issue. Let us start with the Income tax department’s claims about increased efficiency. We are told that “Net direct tax collections have increased from Rs 69,200 crore in 2001-02 to Rs 1,67,000 crore in 05-06 and will cross the Rs 2,00,000 crore this year. That is a 20 per cent per annum increase for five years in a row taking revenue collections from 3 per cent of GDP to 4 per cent . The increase outclasses the growth in non-agriculture GDP plus annual inflation in a significant manner. This is not only because of the boom in economy”. Further, we are told that this 5-year period has seen scrutiny assessments increase from 1.89 lakh to 2.36 lakh with additional tax realisation jumping from Rs 4,325 crore to Rs 16,400 crore. At the same time, cost of collection is one of the lowest worldwide at 0.78 per cent.

The numbers are indeed creditable, but it is debatable if the credit really goes to better tax recovery. Starting salaries in the tech and BPO sector are so high that lakhs of youngsters go straight into the higher tax brackets on joining the work force. In the organised sector, 100 per cent salary increments through job migration are also common. Add to this, the profits from a three-year bull run in the capital market, a realty bubble and sharp growth in corporate earnings and you have a different perspective on increased tax collections. In fact, the usual classes of tax evaders who declare only a fraction of their income legitimately, or scamsters who are raking in money, continue to fly under the radar of the otherwise aggressive tax department.

On the efficacy of e-filing and benefits for individuals, our senior IT source says that and ECS facilities for getting refund cheques is available in several cities but has not picked up because people don’t understand MICR numbers. Sceptical about the claim, I checked and found that tax practitioners nor officials either did not know about the ECS facility or claimed it was inoperative due to technical snags.

However, in Mumbai at least, the demand for speed money to hand over refund cheques has declined. The efficacy of e-filing of returns is another contentious issue. Tax administrators believe that it actually reduces compliance costs. They argue that the ‘e-delivery of tax payer services’ project has enabled the “issue of over 5 lakh PAN cards per month, issue of over 39 lakh refund cheques for over Rs 29,000 crore every year, processing of more than 2 crore returns on system every year, and reduction of average processing time from over 18 months to 3-6 months”.

Again, the data in isolation is impressive; but the payers’ perspective is equally compelling. Take for instance corporate tax returns where e-filing is mandatory. First of all, everybody is in favour of e-filing if it hastens speed and accuracy. Leading chartered accountants complain that the scheme was thrust upon them without adequate technical support and hand-holding. Even today, some of them are not confident of the accuracy of information provided, because the fields created in electronic return forms are ambiguous. They are worried that any mistakes that are discovered later will be blamed on the assessee rather than the system.

Secondly, there are definitely additional costs involved. Instead of attaching photocopies of paper documents, every tiny bit of information has to be electronically uploaded. Since companies issue hundreds of Tax Deduction at Source (TDS) certificates, they now have to feed all the data that was on these certificates into the system; this is time consuming since the information cannot be automatically uploaded. More frustrating is the number of times that the software rejects entries because the date or ward number is not entered in a standardised format. Some of these are teething troubles. But another problem with electronic TDS filing is that in reducing the challans from three to one, a person whose TDS is wrongly reported can suffer from wrong entries by banks and deducting entities.

Senior tax officials have themselves admitted that plenty of errors have already come to their notice. The biggest complaint, however, is that e-filing has not yet reduced paper work for the assesee. All original paper has to be filed and maintained in case the account comes up for a tax scrutiny. Consequently, e-filing has of returns involves extra work for the corporate tax payer at the moment, rather than a relief. This may change over a period of time when the system becomes more robust and glitches such as inaccurate entries by banks (which have already come to the notice of tax authorities) are ironed out.

-- Sucheta Dalal