India in 2017 experienced three remarkable exercises in field of economic and financial restructuring, The first one being the Demonetisation of 500 and 1000 rupees notes, where 86% of the cash in the economy was rendered to be an ineffective and an illegal mode of exchange and store of value (though the notes were demonetised on 8th November 2016, the after effects were felt right from the beginning of the year 2017), The Second one being the preponing the presentation of the Union Budget by a month to that of the last year, third and the latest one being the Implementation of Goods and Services Tax on July 1st, 2017. Rather than the demonetization, whose wounds inflicted on the economy has slowly begun to heal in time, the Implementation of GST uncovered a different truth of the Indian taxation. The truth of the Ineffective Tax Administration in India. The goods and services act as a Tax policy was no doubt a progressive and was a much-required step to get rid of the varied taxes along with their complex tax structure and a great tool to unite the entire Indian Taxation system as a single unit, but the hindrance was not the policy but the tax administration system, where structures such as The Anti-Profiteering Authority, were not effectively brought into force on time and the former tax structures and departments failed to change and adjust accordingly to the new tax regime, where rather than the tax policy legislation, it was the inefficient and weak tax administration that ineffectively implemented the policy.
1.1 Why does India need an Effective Tax Administration?
Tax administration and Tax Policy are inseparable in order to create a successful and a workable tax policy, where effective removal of administrative barriers are required in the smooth implementation of tax policies. Effective tax administration assists in maximising the tax revenue along with improving the average effective tax rates.I.e, the Average effective tax rate for India has remained low when compared to other developed economies, where the low average effective tax rate is due to high rates of tax evasion which has resulted in having a very low tax base. Where the causes and consequences of the weak tax administration are discussed in the further sections.
2.0 THE CAUSES
2.1 Inaccurate Tax Database System
The database system for taxation in India which is overly dependent on the PAN(permanent account number) has not stood up to the expected levels of accuracy. In the cases in which the taxpayers when they shift from one tax district to another tax district, unless and until the taxpayer himself verifies of doing so, the taxpayer would be termed as a stop filer in one district and as a new taxpayer in the district he shifted to, where the discrepancies in the data can lead to misunderstanding and analysing of the tax base and payment option in the district. Another case being of the problem of double counting (where efforts are being made to overcome it through the Cross-linking of Aadhar with PAN and Bank Accounts), where taxpayer would’ve two or more PAN, which can be either due to purposive violation or just through sheer confusion where steps should be taken to overcome these errors.
2.2 False Tax Auditing and Ineffective Third-Party Resources
The Indian tax administration depends highly on the audit function, where a false tax auditing system acts as a great hindrance in an institutions ability to enforce compliance on taxpayers. In India, Tax due is predominantly calculated through the documents and returns which are most of the “voluntarily” filed by the taxpayers.
Besides, the documents filed by the taxpayer, the tax due can be calculated through varied third-party sources based on various investments and expenditures records, but finding, tracking and assessing these kinds of third-party sources require a considerable amount of logistics and man-hours for the Tax administrative institutions, which is non-viable for a highly populated country like that of India, which has a limited tax base and a larger number of tax evaders and individuals who don’t pay taxes.
But furthermore, according to the paper Indexing the Effectiveness of Tax Administration(Kumar et al, 2007), it states that in the collection of Personal Tax, even if the Tax administrative institutions collect third-party information, The pre-assessment and the post-assessment, did not show any significant change in the percentage of Tax-collected. Also, the pre-assessment and the post-assessment patterns have stagnated.ie., despite the efforts from the tax administrative institutions to tackle tax evasion and improve the collection of information, the effectiveness of the use of information has not seen any form of noticeable improvements.
But, on the contrary OECD(Organisation for Economic Cooperation and Development) claims that India is collecting a significantly higher amount of post-assessment taxes as a percentage of total tax collected when compared to the other developing countries. But, the main argument here being that the Indian Tax Administrative institutions can be more effective in the system of collection of taxes and is not reasonable to compare India with that of the OECD countries as they possess better social security systems, socio-economic conditions and a better governance system which would automatically result in a much higher Tax compliance.
2.3 Tax Delinquencies and Complex Tax Law Structures
The Inefficiency of the Indian Tax administration is very much evident from the figures of the raising Total arrear demand which is multiplying at an annual growth rate of 30%, where the arrear demand which was around 22928 crores in 1995-96 rose to a staggering 98612 crores in 2005-06 and the last financial years(2016-17) figures being an unbelievable sum of 9.30 Lakh crores, where for the record the budget estimates for the same financial year was 8.27 Lakh Crores.(SOURCE: Central Action Plan 2016-17, CBDT), but despite of the sharply rising arrear demands, the percentage collected out of the Arrear demands has largely stagnated overtime, where the cash collection percentage has clung between 8 and 9 percent, with an exception to the financial year 1999-2000 where the collection percentage was around 68%, due to the efforts of the government to introduce a scheme to settle tax arrears.
To solely blame the inefficiency of the Tax administrative authorities would be wrong, where tax demands in India can be in dispute before the courts, which again at the cost of the inefficiency of the judiciary can take unreasonable amounts of time. Even if the disputes turn against the favor of the taxpayer, the system allows him/her to appeal to the higher courts and delay the payment of the taxes. Apart from this, the corruption and collusion in the bureaucracy, double counting, and destruction or lack of evidence also have an effect on the inefficiency in tax administration and collection.
3.0 WAYS TO CREATE A BETTER TAX ADMINISTRATIVE SYSTEM
3.1 The Kaldor-Higgins System
The Kaldor-Higgins system was postulated by Higgins, where he furthered the idea proposed by Kaldor(1956) of interlinking the taxes to force compliance. I.e., Kaldor suggested to link the income tax, wealth tax, gift tax, personal expenditure tax and capital gains tax, such that they are filed, audited and accessed simultaneously, so that the taxes are self-checked and cross-verified, where understatement and concealment of items is not possible, as the act of avoiding one liability would lead to the increase in the liability of another tax. for example, let’s say that a person spends an amount X to buy a birthday gift, and doesn’t show it to avoid gift tax. But, in the Kaldor-Higgins system, where the above-mentioned taxes are accessed simultaneously along with the personal income, if the spending on the gift is not shown as the gift tax or at least the personal expenditure tax, then it will be by default be accessed in the capital gains tax or wealth tax in the form of either investment or savings, which means there are no possible means to evade taxation. This idea was furthered by Higgins to postulate a self-linking tax system for the developing countries. But, the greatest drawback of this system is its practical feasibility, where it has remained greatly theoretical. Though Kaldor Initially designed it for India and Higgins developed for the developing countries, the system cannot be employed in India as Kaldor-Higgins system demands for a “Highly Efficient Tax System”, whereas, most of the developing nations including India has a struggling and an inefficient Tax Administration.
3.2 Efficient penalties for Tax evasion
Empirical evidences from Latin countries show that 3 to 12 percent of the delinquent taxpayers account to around 65 to 90 percent of the delinquent taxes to be paid and in India a similar situation exists where around 80 percent of the delinquent taxes need to be paid by only by 200 taxpayers (Kumar et al, 2007), which means that imposing penalties and enforced tax collection from these individuals would have a stupendous change in the post-assessment collection of arrears. But, the argument here is the imposition of penalties and the severity of the penalties imposed on the economic crime committed. there are various arguments against enforcing severe punishments on the tax evaders. Firstly, it is the fault of the government and the tax administrative authorities, of giving a free choice to the people to pay or evade taxes .i.e., even though it is regarded as a duty to pay the taxes, there have been no strict measures and tools adopted to get citizens into the tax net, so rather than the people’s intent of paying taxes it is the government’s incompetence to collect it. Secondly, it is very difficult to prove an individual's intent of evading taxes to that of being ignorant. Thirdly, if a tax evader is caught it is to be noted that he was only caught because of “random selection”, out of a pool of tax evaders, which means that charging the person with excessive punishment (like Life Imprisonment) is deemed to be unfair, while other evaders are unpunished(Mansfield,1988). But, on the contrary penalties from administrative authorities will instill a sense of fear among the tax evader and will eventually increase the pre-assessment tax collection, and would decrease the burden on the tax administrative institutions to conduct post-assessment arrear collection (Bagchi,1995).
3.3 Arrear Settlement Schemes
The arrear settlement Schemes seem to have been historically very effective, as mentioned earlier the Financial Year 1999-2000, saw a remarkable collection of 68.54% of the total arrear demand, where under the twelfth and the thirteenth Lok Sabha the then Finance Minister Yashwant Sinha introduced the “KAR VIVAD SAMADHAN SCHEME”, where the scheme enabled speedy payment of arrears of taxes which are in dispute and a time limit within which the eligible taxpayers were supposed to clear the arrears due before the due date failing which would invite penalties. and from the figures the Scheme can say to be highly successful, but also the downfall of this is, these schemes have a very short-term effect, where if to be argued from the historical data having shown a collection of 30 thousand crores during the financial year of 1999-2000, the cash collection form arrear demand dipped back to a 4.9 thousand crores the very next financial year. Though, this kind of schemes are short-lived, they seem to have a dramatic effect in the short run, where the government can adopt these schemes in a necessary scenario, and can also try to formulate and restructure similar kind of schemes in the long run, which would have their respective impact in the short run.
4.0 CONCLUSION
To conclude on a positive note, currently the Indian tax administration may portray itself to be incompetent and out of place, considering the failure to effectively implement goods and services tax on time, or to recover unaccounted post-assessment arrears after the collapse of the biggest economic experiment of the decade. Having looked into the causes of this inefficiency such as the outdated and inaccurate database systems, tax evader, complex tax law structure, falsified audits and low pre-assessment collection, may all seem like the tax administration has no way out of this complex web. But, when we look at the solutions, indeed Indian Tax Administration can gradually and structurally become efficient by following stricter penalty patterns, adopting the more efficient system and model, and by enforcing more practical policies like the arrear settlement schemes. Where an improvement in efficiency in the tax administration, would give a huge boost to India’s developing economy.