India’s budget 2014-15: Initial steps towards professionalising tax administration.
There has been widespread concern that the current organisations and systems of tax administration and compliance require fundamental reform. The economic cost to the society, including costs of compliance by the taxpayers, and distortions in economic decision making due to inconsistency in tax administration procedures, and poor design of tax laws and regulations, inappropriate skill sets and work process of tax organisations, and insufficient use of technology, are regarded as disproportionate to the tax revenue obtained. The tax system and its administration are also widely and correctly perceived to leave substantial scope for improving fairness.
As India’s economy continues to grow (2013 GDP is estimated to be about INR 120 trillion) and as India accelerates its engagement with the rest of the world, modern professional tax administration has become even more essential.
During the financial year 2012-13 combined Union and State government expenditure was estimated to be about 26 percent of GDP; (INR 23,000 per person); while the corresponding ratio for tax revenue was 16 percent of GDP; (INR 14,000 per person). Thus, tax revenue financed only about three- fifths of total expenditure, which is lower than many other emerging economies such as Indonesia. As the level of expenditure and taxes are already relatively high, improving tax administration and compliance efficiency and effectiveness, while improving fairness, represents an avenue for improved public financial management.
The first budget of the prime minister Narendra Modi led NDA (National Democratic Alliance), presented on July 10, 2014, and recognises the importance of reforming tax administration and enhancing trust and confidence of the tax payers in the organisations involved in tax administration, particularly in these administering income tax, service tax, and excise taxes.
The key points of the Budget proposals concerning tax administration, contained in paragraph 10 to 15,204 and 209-210 of the Budget speech, may be summarised as follows:
One, the damage to India’s investment climate and competitiveness due to retrospective taxation measures introduced in 2012 are recognised. The proposal is that any fresh cases under these provisions are unlikely to be pursued, and ongoing cases will be brought to a closure expeditiously.
Two, some analysts would have preferred the retrospective tax features to be withdrawn. But this view has been not reflects in Budget. It is hoped that in the future drafting of tax laws and implementing regulations will be undertaken with greater care, keeping in mind the need to encourage maximum voluntary compliance. This is recognised in part as the Budget expands the scope of Advanced Tax Rulings, under which tax implications of a proposed transaction can be established in advance of the decision.
Three, the budget has recognised that India’s Transfer pricing regulations need to be made more consistent with international practices (Para 204). The consequent Amendments are expected to bring greater clarity in international taxation.
It would be useful to consider developing specialties in international taxation within the tax organisations, with appropriate longer term tenure and work environment.
One, the Budget expresses concern that tax demands of more INR 4 Lakh crore (equivalent to 3.6 percent of GDP) are under dispute and litigation. (Para 11).
Two, To address this issue and to enable better utilisation of skill-sets of professional tax administrators, relatively small incremental changes in administration and regulation, while welcome, would however be insufficient.
Three, the Budget hopes that the Income- Tax Department would transform itself from being just an enforcer to a facilitator. The Budget proposed 60 more Aykar Seva Kendra (ASK) across the country during the 2014-15 financial year (Para 209).
Four, transforming an Income Tax (or any other Tax) Department, accustomed for decades to relying on the statutory powers, to a service- oriented facilitator is however a difficult exercise requiring skills in managing organisational change.
Comments on the Budget proposal:
The focus of the 2014-15 Budget on issue in tax administration, and on reducing compliance costs of taxes is welcome.The Budget proposals however are in the right direction, and will be helpful in addressing some of the immediate concerns such as retrospective taxation, and transfer pricing issues. However, as the first Report of the Tax Administration Reform Commission (TARC), submitted on May 30, 2014 emphasises, there is a need for far reaching changes in the spirit, purpose, organisational structures, skill sets, internal work processes, external communication and dispute management of tax organisations involving both direction and indirect taxes. Greater synergy between the two (including sharing of certain services to save costs), and emphasis on functional specialization in their activities are needed.
The focus of modern professional tax organisations is not primarily on revenue collection. It is on creating a tax organisational culture and environment in which maximum voluntary tax compliance occurs. This requires, among others, tax rules and regulations that are sensitive to economic and commercial conditions, and which are system-oriented and not individual- oriented.
Among the most important factor generating tax revenue is the level and growth of economic activities which in turn impact on the tax bases. Thus, tax administration should not be a hindrance to legitimate economic activities.
In India, there is considerable potential to increase the number of tax payers for each tax, and the proportion of true tax-base that is reported. Thus, for individual income tax, the estimates are that the current 35 million taxpayers number is conservatively only half of the number who should be paying income tax. In many occupations, the proportion of true income reported ranges from 25 to 50 percent.
Thus, to expand tax base, a more effective and fair method to generate revenue, a systematic empirical – evidence based approach to tracking the missing taxpayers, and to improve the true-income reported is needed. Tax Research and Analysis Division (TRAD), covering all Union Government Taxes, therefore deserves consideration. The first report of TRAC has recommended. Tax council and Tax Policy and Analysis Unit, with a broader mandate than what is suggested for TRAD. The analysis suggested that to expand tax base needs to undertaken for other Union taxes as well.
There is a strong case for not resorting to tax revenue targets, determined in an ad-hoc manner. Instead, revenue projections need to be based on the basis of a rigorous analytical model. It is potential revenue generation, rigorously estimated which should drive expenditure, not the other way round as appears to been the current practice, which gives adverse incentive to both tax official and taxpayers.
In conclusion, as with many areas of governance, tax administration and compliance issues need to be addressed with a greater degree of professionalism, outcome-orientation, and taxpayers-citizen centric manner; and approached from a systemic rather than fragmented perspective. It is hoped that tax administration proposal in the future budgets would accelerate the progress of India’s tax organisations and policymaking process in the directions outlined above.
Photo: Blind Dayze