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Tuesday, 05 March 2013 00:00
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Bad idea to give powers of arrest to taxman

 

Given the fact that just 42,800 Indians admit to having annual incomes of over R1 crore or the fact that tax dues have jumped from R1,88,000 in FY11 to R2,56,000 crore in FY12, it’s understandable that the finance minister should feel matters are getting out of control. Add to this the fact that several high-profile firms have, over the past few years, deducted provident fund from employees’ salaries and charged service tax without depositing this with the taxman, and the picture looks a lot worse.

But while the finance minister has given powers to the taxman to, in some cases, even make arrests of recalcitrant service taxpayers, this power needs to be seen in the context of its possible abuse. While cases of overzealous taxmen abusing their powers are well-known, it is important to keep in mind the concerns of taxpayers today. The number of transfer pricing adjustment demands is up from R1,220 crore in FY06 to R44,532 crore in FY12, prompting investors like Shell to take on the government publicly. Such is the level of suspicion that, when there was some confusion over whether tax residency certificates from Mauritius would be accepted at face value, the markets tanked.

It is also important to keep some perspective on tax collections in the country. Though the tax-to-GDP ratios have fallen in recent years, India’s collections are not too dissimilar from those of countries that have similar GDP—indeed, given the levels of poverty and the segments of the economy that are out of the purview of the taxman, the numbers look even better. To the extent tax ratios have fallen, these are a factor of industry stagnating and profits collapsing—indeed, the surge in oil under-recoveries, largely funded through oil PSUs, has also lowered corporate tax collections. On service taxes, similarly, while there may be 10 lakh non-filers, for whom the FM has announced an amnesty scheme, service tax collections grew from just R14,200 crore in FY05 to R1,33,000 crore in FY13—and we’re looking at R1,80,000 crore in FY14. While the FM has done a good job to concentrate on nabbing taxpayers who are not declaring incomes—1.2 million potential non-filers have been identified in the case of personal income taxes—he needs to temper the need for more taxes with the impact of harassment by the taxman. In the same way the finance minister has planned a Tax Administration Reform Commission to review the application of tax policies on the direct tax side, it may be a good idea to look at this for the indirect tax side as well.

 
 

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