Officials using ‘80:20 rule’ to spare small taxpayers, go after big fish
The ‘80:20 rule’ helps to ease the compliance burden of small taxpayers and allows tax officials to make quality assessments of large taxpayers
New Delhi: A simple statistical thumb rule is increasingly guiding tax policy, letting the authorities spare millions of small taxpayers from cumbersome paperwork and focus on the big fish. The so called ‘80:20 rule’ that suggests 80% of taxpayers contribute only 20% of revenue collected while the remaining minority account for the lion’s share of tax proceeds is being used by both direct and indirect tax administrations to ensure compliance and realize revenue.
It helps to ease the compliance burden of small taxpayers and frees up the time and resources of tax officials to make quality assessments of large tax payers, officials from both the income tax department and the federal indirect tax body, the Goods and Services Tax (GST) Council, said on the condition of anonymity. The GST Council used this approach to give compliance relief to a large number of micro, small and medium enterprises (MSMEs) by raising the eligibility threshold of a special quarterly tax payment and return filing window to Rs 1.5 crore annual sales, from the original Rs 50 lakh in three stages since June.
“We have to ease the pain of MSMEs. That is a priority. Anyway they contribute only 5% of total indirect tax revenue,” an official of the GST Council said on condition of anonymity.
The income tax department, on the other hand, used the same logic to reduce the number of cases taken up for scrutiny. The number of cases chosen for scrutiny was cut down to less than 0.5% of tax returns filed in assessment year 2016-17 (relating to income for financial year 2015-16), compared to about 1% of returns in the previous assessment years.
“You have to see the risk of revenue leakage from an assessee before deploying resources for scrutiny,” said an official from the income tax department, also on condition of anonymity.
Also, with the heightened use of data analytics, the department is able to close in on suspected cases of tax evasion, sparing the vast majority of others of hassles.
Going by this thumb rule, the Central Board of Direct Taxes (CBDT) in October told field officers not to propose any adjustment in taxable income of individuals even if their declared income is less than what has been reported to the tax department by their employers and banks and financial institutions managing their savings.
Adjustment to taxable income will be proposed only in cases where a source of income has been omitted altogether in the tax returns filed. This is a major relaxation from a provision introduced in the Income Tax Act through Finance Act of 2016 proposing adjustments in taxable income reported by assessees by taking into account the statements of employers and other entities.
The 80:20 rule is applied by businesses on a variety of situations including for deploying their best talent to manage top selling brands. Many makers of packaged consumer goods get 70-80% of their revenue from a few top brands, an industry executive said on condition of anonymity.
Tax experts said it would be desirable to use the same approach of focusing on large taxpayers for revenue realisation in providing tax payer services and removal of difficulties as well.
“It would be good if large businesses are completely brought on board and their difficulties resolved and mid-sized businesses are covered thereafter as a staggered approach would be beneficial to all stakeholders,” said M.S. Mani, partner-GST, Deloitte India. Mani said that the GST compliance framework was quite intensive for all businesses and the glitches in the technology platform had magnified the compliance challenge.
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