|Make it less taxing|
|Wednesday, 28 August 2013 00:00|
Tax litigation is rising while collections remain stagnant. A more responsive system is needed
If the dramatic increase in the number of tax demands being made, or the rise in resultant tax litigation, was accompanied by an equally large hike in tax collections, it might be acceptable, even though upsetting taxpayers, especially if they are large corporates, is seldom a good idea, given that they are also investors. With a tax-GDP ratio of 10.3 per cent in 2012-13, however, the number isn't dramatically different from the pre-reforms 10.32 per cent in 1989-90. Meanwhile, apart from the high-profile Rs 20,000 crore tax demand on Vodafone, despite the telecom major winning its case in the Supreme Court, transfer pricing adjustments — where the taxman says Indian arms of MNCs are declaring lower incomes to avoid taxation — surged from Rs 44,000 crore in 2011-12 to Rs 70,000 crore in 2012-13. While tax arrears have doubled from Rs 2.5 lakh crore in 2010-11 for direct taxes to Rs 4.8 lakh crore in 2012-13, it's useful to keep in mind just how meaningless much of this has been, and the costs of alienating potential investors. Over 60 per cent of the appeals filed by the taxman were dismissed in various courts in 2011-12.
It is to fix this, or as much of it as can be fixed, that the finance minister has constituted a tax administration reforms commission under Parthasarathi Shome — it's a different matter that the suggestion of another Shome-led committee, that the Vodafone retrospective amendment be rolled back, has been disregarded. Shome's task is to look at how to make the department less intrusive while making it more effective, and to come up with key performance indicators — the ratio of successful tax collections versus the tax demands raised, for instance.
Some solutions have already been put in place. In the case of service taxes, mandatory e-filing has made a marked difference since the computer rejected returns which took credit for payments made by vendors who didn't have valid service tax numbers — immediately, it was in the interest of big firms to ensure the vendors they used filed their service taxes. A 34 per cent rise in e-filing of personal income taxes in FY13, similarly, ensured a 21 per cent rise in taxes in a year the economy grew at its slowest pace in years. Such e-filing lets the computer immediately tell the taxman that the assessee's income is way below his credit card spending — in FY13, while just 14.6 lakh persons declared an income of more than Rs 10 lakh, 52.4 lakh persons invested more than Rs 2 lakh in mutual funds. The income tax department's IT gameplan will be critical.