· Compliance is a big barrier to tax collection; the cost of inefficiency in compliance should not be borne by honest tax payers
· Higher Taxes on lucrative segments, and emerging areas results in Higher Tax Evasion is giving rise to smuggling, flooding of counterfeit products and underground operations
· Simplified and Consistent Tax Structure is needed; Complex Taxes encourages evasion
· Tax net needs to be widened, by including tier 2 towns and cities with rapidly growing economic activity into its ambit
New Delhi, 22 December 2022: Think Change Forum (TCF), an independent think tank dedicated to generating new ideas and finding solutions for navigating the post-pandemic world, today released recommendations based on a virtual roundtable on “Pre-Budget Discussion: Does Indian Needs a Re-Think of the current Taxation Approach?. The event had five eminent panelists: Mr. Swapan Sarkar – Owner Sarkar & Associates; Mr. P. C Jha, Former Chairman, CBIC and Advisor, FICCI CASCADE; Mr. Sandeep Chilana – Managing Partner Chilana & Chilana Law Officers; Dr. Sanjay Baru, Eminent Journalist and Advisor, Think Change Forum and Mr. S Ramakrishnan – Public Finance Expert.
The discussion was centered around the topic of whether India needs tax widening to raise government revenue earnings. Experts agreed with the need to grow tax revenues for the government to drive economic growth and make investments in developmental activities. Towards this end, poor compliance was identified as the no. 1 deterrent in achieving targeted collections leading to complex issues like overtaxing, complicated tax structures, rising litigation, among others. The panellists extensively laid emphasis on better compliance processes to be put in place backed by technological support which in turn will enable tax widening and need for strategies to strengthen tax collections from Tier 2 towns and cities to widen the tax net.
A key challenge to smooth compliances is the tax collectors temptation to put higher tax on lucrative segments and the emerging sectors of the economy. This leads to growth in practices like smuggling, counterfeit goods and underground operations. The panellists also argued on the need for consistent and less complex taxation system for the country in order to lessen tax evasion and also encourage domestic and foreign investors. To enable better profitability and encourage investments, taxes should be moderate for new emerging sectors particularly technology sector. A broad-based approach to corporate taxation is also what the experts recommend.
Swapan Sarkar, Owner Sarkar and Associates speaking about the complexity of Indian taxation said “India needs a consistent and simplified tax structure like other emerging markets in the world. There is constant tinkering in the law, every time a loophole is observed, the policy makers start correcting it and making changes. This is concerning for both domestic as well as foreign inventors.”
“Moreover, Income Tax in India has several components other than the tax rate such as surcharge and cess. This is paid by individuals as well as corporates on top of tax paid on earned income. This increases the total tax payout which can go as high as 42% in the case of individuals as the surcharge on individual taxation is around 10 to 35%. The Government should completely do away with cess and surcharge as it is responsible for an overall increase in direct tax payout and disturbs the federal structure of the country as well,” Mr. Sarkar added.
PC Jha, Former Chairman, CBIC and Adviser- FICCI Cascade said “Enforcement agencies are working hard to check the illicit trade, but tax evaders are ahead of curve and using innovative techniques to smuggle goods into our country. There is a need to deploy modern technology, install more scanners at ports and use artificial intelligence to address the counterfeiting issue.”
Adding to the above, Mr. Jha, said “Goods with higher profit margins like gold, tobacco and alcohol which are highly taxed, lead to tax evasion and smuggling. As per FICCI CASCADE’s recent study, Illicit Markets: A Threat to Our National Interests, the estimated tax loss to the government in two highly regulated and taxed industries, tobacco products, and alcoholic beverages is over Rs28,500/- crores. Capacity enhancement programmes of enforcement agencies and use of cutting edge technologies will certainly create a sense of fear amongst those who wish to indulge in smuggling and tax evasion activities and curb the illicit trade.”
Sandeep Chilana – Managing Partner Chilana & Chilana Law Offices said, “Tax litigation is one of the biggest burdens on the system. It arises because we do not have a simple tax system and individuals and businesses try to the reduce tax burden by leveraging complex laws. Complex laws lead to higher cost of administration as well as lack of clarity in ease of doing business. When GST was started it was supposed to be a simple law. As the government started realising that tax refund or export related frauds started happening the government immediately brought in various restrictive rules. But this was like trying to kill a mosquito with a hammer – to catch a few, the majority is made to suffer which is mostly compliant. So in terms of tax laws, there is needed a rethink of such excessive laws.”
“High taxes are leading to evasion. Some businessmen believe that government takes 40% of their earnings by being a sleeping partner and there is no return on their taxes such as better infrastructure or citizen facilities like healthcare or education. Again, there are just 10 to 11 thousand individuals who are filing their income tax return of 1 crore and above which is shocking as any expenditure pattern study will not support this figure. So compliance has to improve. There is a case for a threshold for agricultural income also,” Mr. Chilana added.
Dr. Sanjay Baru, Eminent Journalist and Advisor, Think Change Forum said, “In India, there is an unweildy bureaucratic system and a large section of individuals escapes and avoids taxes without being punished for it. In India only a small percentage pays taxes. If we compare our Tax GDP ratio with other rapidly developing economies it is below par.”
“To garner more taxes we need to focus on compliance which is an administrative problem that needs to be resolved and fine-tuned. The tax net needs to be spread wider and cover Tier 2 cities as well. We also need to leverage technology to cast the net wider and increase compliance. Predictibality in the taxation system is equally important to ensure compliance,” Dr. Baru added.
Talking to the panel, Mr. S. Ramakrishnan, Public Finance Expert said, “In India, the tax to GDP ratio is around 20% including central, State, and local administration taxes. This is not very high owing to a huge base and lack of compliance in the system. One way to raise tax compliance is to have a clear matrix estimation in terms of how much compliance has happened, and how much should have happened and then evaluate where are the gaps and ways and means to address these gaps. GST has brought a lot of compliance into the taxation system but in turn, has affected the MSME sector. The profit margins of businesses have been affected by 50%. Having said that, the problem also lies in MSMEs not knowing how to maximise Input tax credit and increase their profitability.”
“It is important to not make changes in the current corporate taxation, at least for the next 2 years as many corporates are still recovering from the effect of the pandemic. The Government can increase checks to ensure that corporates are investing back to infuse economic growth. The government should also look at revising the pension scheme and increase it from Rs. 50,000 to 2 lakhs so that people save more.,” He added.