Shome panel suggests sweeping reforms
Given the dramatic shortfall in tax collections over several years, the R4.1 lakh crore stuck in litigation, the R2 lakh crore in transfer pricing adjustments over the last 5 years and the number of top MNCs who are trying to file for arbitration against the government, it is not surprising that the Tax Administration Reform Commission (TARC) should come out with the kind of sweeping reforms it has. Given the budget is just a few weeks away, chances are the finance minister won’t take them into account, but over the next few months, he simply has to devote attention to the issues raised and the remedies suggested, including abolishing the post of the revenue secretary and upgrading the jobs of the heads of direct and indirect taxation. While the major part of the blame for retrospective taxation, for instance, has to be laid at the door of the then finance minister who was involved in a gap-filling exercise of finding funds for favoured political programmes, the problem is not confined to just this single instance.
There are many places where one can begin with in terms of fixing the problem, the attitude of the taxman for instance, or the lack of a collaborative approach with the taxpayer—and the TARC report stresses many more—but the single-largest problem is that the taxman simply hasn’t modernised and functions in silos even today. In even the Large Taxpayer Units, the report says, the direct and indirect tax wings don’t collaborate; there is very little use of ICT tools to do risk analysis before the taxman files cases or decides to litigate them in various courts. Frighteningly, there are revenue targets fixed for transfer pricing officials—hardly surprising, then, that transfer pricing adjustment cases have risen the way they have and have been issued to MNCs who are guilty of merely repatriating money to expand their Indian ventures.
Worse, thanks to the fear of vigilance inquiries, there is a practice of the taxman issuing ‘protective’ tax demands—demands that are issued only to ensure there is no vigilance inquiry later on—as well as litigating cases all the way up to the Supreme Court. Any rational tax set up that looked at data before taking any further step would realise the futility of such demand notices/litigation, apart from the harassment of taxpayers. Indeed, using ICT tools—TARC says little use has been made of the reams of information collected over the years from jewellers, credit card firms, car dealers, etc—would be a good way to figure out where the department should be concentrating as well as driving tax policy. A rudimentary analysis of income tax filings, for instance, would make it clear the largest tax avoidance is in the R10-20 lakh income bracket—flattening the tax structure is the logical conclusion that the taxman should draw from this. Indeed, as the report suggests, impact-analyses should be de rigeur for any taxation proposal, sectoral expertise has to be developed and, most important, the revenue secretary’s oversight of the two tax wings should be replaced by a Governing Council that includes outside members as well; an Independent Evaluation Office needs to be set up, and its reports published regularly.