Independent audit of taxman's orders critical
Though the actual position will only be known at the end of the year, chances are the new black-money window IDS-2 will do well since, for those who have not already laundered their black money post-demonetisation, it would make more sense to give up 55-56% of it to the government instead of losing it all. Given the government brought in Rs 1.2 lakh crore into the tax net in the two years prior to IDS-1 and netted another Rs 67,000 crore in IDS-1, if it gets, say, Rs1 lakh crore in IDS-2, that’s an additional Rs 3 lakh crore that will have been brought into the tax net and which will contribute to additional taxation every year—this is in addition to the black money that will have come into the system via the laundering efforts we have seen over the past few weeks. Even more dramatic results can be achieved with sensible changes in tax policy in the budget—if those who have laundered their funds at 15-20% cost find the top tax level going down to 30%, from 35% right now, chances are they will be keen to declare more of their incomes. Comparing the tax returns for assessment year 2014-15 with a theoretical income structure for the year—based on PRICE’s ICE survey—you get a compliance ratio of around 25% for Rs 3.5-10 lakh income bracket; that is, a fourth of the number of people in that income group paid taxes in that year. This ratio, however, suddenly falls to around 10% for those in the R10-15 lakh tax bracket, and then rises again to the 21-22% range for those in the Rs 15-30 lakh bracket and Rs 30-100 lakh bracket—this is in keeping with economist Surjit Bhalla’s ‘missing middle’ theory, where those earning around Rs 10-15 lakh per year pay lesser taxes than they should, probably the result of the 30% tax bracket kicking in at Rs10 lakh itself. Finance minister Arun Jaitley would do well to revisit the Direct Taxes Code which proposed to remove most tax deductions while, simultaneously, lowering tax rates significantly.
Equally important, if the momentum of the demonetisation is to be sustained, the need is to reduce the powers of the taxman to harass taxpayers. The taxman’s absurd tax notices in the case of corporates like Vodafone and Cairn are well known, as are the ballooning transfer-pricing cases where the addition to the income of companies totalled Rs 2.2 lakh crore between FY12 and FY15, and the MakeMyTrip case, where the travel portal’s CFO was arrested without even a show-cause notice, is the classic example of tax-tortion. What is less appreciated are the big additions the taxman does to even personal income tax filings and how these are routinely challenged. In assessment year 2011-12, the disputed notices added up to Rs 137,670 crore versus the undisputed notices of Rs 32,280 crore. By assessment year 2014-15, the disputed notices rose to Rs 276,915 crore—while undisputed notices were around a fourth of the disputed ones in 2011-12, these fell to under a tenth in 2014-15. While there are no details for how income-tax cases fared in various courts, given the taxman’s poor record of defending other tax notices, chances are these too fared similarly. In a situation where the taxman’s actions have been suspect, finance minister Jaitley would do well to institute an audit mechanism, preferably independent of the CBDT, to see how fair the taxman’s scrutiny of tax returns really is—if the taxman unfairly asks assessees to pay more, the chances of a bribe being paid are that much higher.