Sucheta Dalal :Perils of alienating honest tax payers
Sucheta Dalal

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Perils of alienating honest tax payers  

Jul 31, 2006

Consider this. When Osama Bin Laden’s crack suicide team brought down the twin towers of the World Trade Centre, President George W. Bush urged people to go about their business as usual. He asked people to ‘resume shopping, do your business, get down to Disney World in Florida’.


If equating patriotism with spending and consumption is one end of the spectrum, look at where we stand. For the last couple of years, India’s 8% growth is clearly consumption led. Salaries have doubled and trebled, the stock markets are booming; ESOPs (Employee Stock Option Plans) are turning ordinary people into crorepatis and people are buying houses, cars, motorcycles, luxury goods and splurging on food, clothes, entertainment and travel. The government is a big beneficiary because it collects increased direct or indirect tax on all this new spending.


Is the government happy that this consumption is keeping the economy ticking despite rising petrol prices and inflationary pressure? No. India’s Finance Minister (FM) never misses an opportunity to frighten middle-class spenders into putting away their cash.


If the aim is to frighten people into paying higher taxes, then it isn’t quite working. Exhorted by the FM, over-zealous taxmen seem to presume that anyone who is spending more money is a potential tax evader. Yet the numbers indicate otherwise. Media reports say that corporate tax collections from Mumbai alone have jumped an unprecedented 92% and individuals have just filed their tax returns.


Even before these are checked and assessed, the government is signalling that an annual spend of Rs two lakhs on a credit card makes a person potentially suspect, doesn’t matter that his/her monthly income is probably as much and is paid after deducting tax at source. Other countries encourage plastic money because it establishes audit trails, we find it fishy.


A 100% wage increment for a salaried individual means a 100% jump in tax collected by the government; but without waiting to check the numbers, the tax department has rushed to amend the ‘Saral’ Form 2F and demand detailed cash-flow statements with opening and closing balance. Again, the presumption is that every salaried person is a tax-evader who has made loads of money on the capital market and is hiding it in undeclared bank accounts.


The numbers bust this outlandish notion too. One depository has 77 lakh accounts and another has 22 lakh; together they constitute the active investor population and include a few lakh multiple accounts (genuine ones) and fake one as well as the institutional investor segment. A tiny fraction of these are salaried employees and a tinier fraction of those avoid tax through non-disclosure. Why hound and penalise all salaried employees by asking for detailed cash flow statements or opening and closing balances?


Why should salaried persons be burdened with keeping a detailed account of their spending? Why doesn’t the IT department concentrate on buyers of super-luxury brands of watches, jewellery, luggage and couture which have a hidden clientele that never reports purchases in India? Scores of angry letters in my mailbox indicate that the FM is successfully alienating the entire tax-paying community from salaried youngsters to senior citizens.


Here are some of their experiences with the Tax Department—a former investment banker says the mere fact that people are eating out far more often has means additional employment for a range of service providers from chefs, waiters, carpenters, maintenance and delivery workers, janitors, crockery makers, designers not to mention increased consumption of consumables and fittings. That is why there is a HR crisis in the major cities and an acute short supply of employable people for the entire spectrum from upper-end engineers, pilots, management professionals and chefs right down to secretaries, waiters, shop assistants, air-hostesses, drivers etc. Shouldn’t the country encourage the trend?


A senior banker, who would be classified as a high networth individual since his vested ESOPs are worth tens of crore rupees, received an IT notice based on the Annual Information Return. Why is he being questioned before verifying whether the money spent is reflected in his tax return? Why must he, a salaried employee, waste time answering IT queries simply because he is spending more money?


One reader says, ‘‘This is merely an opportunity to allow tax officials to harass people’’, especially since the eminent FM has not announced a single measure to reduce corruption among tax officials or allow people to complain more easily about specific cases of extortion or persecution.


The bigger question is why is the Prime Minister standing by and watching? How is it in the nation’s interest for tax payers to be treated like potential evaders and petty scamsters when there is daily evidence of rampant corruption in most government decisions especially those involving politicians and big business?


A reader describes how Tax officials call assesses in advance asking them to ‘‘arrange hotels and pay other expenses’’ and also hand over the bills in order to be able to claim official reimbursement of costs and allowances. Refusing to comply means disallowance of genuine expenses, summons to the IT office and frequent postponements of hearing. The speed money for handing over IT refund orders is already notorious.


Some readers wonder why the government does not abolish income tax and levy a Value Added Tax that is bound to increase tax collections. Ahmedabad-based Ashok Banerjee sums up these sentiments by aptly quoting the economist CN Parkinson. He said, ‘‘the reader can rest assured that taxes are evaded in this country [Britan] and that too on a large scale. People who consider themselves patriotic and law-abiding, who would willingly pick up a rifle to defend their country, would also readily falsify their tax returns if they feel that they can get away with it. They believe that taxes are set by people whose own contribution will be negligible’’.


In our case, it is ‘negative’, except that salaried people have no scope for evasion or falsification since the tax is directly deducted.


-- Sucheta Dalal