Home >Money >Personal Finance >Opinion | Govt needs to align expenditure with realistic estimate of tax collection
Photo: iStock
Photo: iStock

Opinion | Govt needs to align expenditure with realistic estimate of tax collection

This can do away with a large number of ills that afflict the Indian tax system

At a recent conference of Income Tax Appellate Tribunal members, the Chief Justice of India reportedly said that arbitrary and excessive taxation is as bad as tax evasion, and that the government should collect tax without harming the taxpayers, just as a honeybee collects nectar without harming the flower. In the current environment, this reminder to the government and tax authorities is extremely apt.

Today, with the government having lowered corporate taxes significantly, tax collected so far has seen a significant dip compared to the figures for the earlier year. Yet the income tax department is being pressurized to meet the original tax targets set of around 17.5% growth in tax collections. The tax department obviously then takes various actions, which affect taxpayers. What are the effects of such pressure on taxpayers?

Large additions are made in assessment proceedings, and taxpayers are pressurized to pay 20% of such large demands before 31 March, though they may be disputing such additions in appeal, and may have appeal orders in their favour in earlier years on the same issue. A classic recent case is a reported Bombay high court decision in the case of a public sector insurer, where the taxpayer was being asked to pay 20% of 3,600 crore (or 720 crore), and its bank account was attached for non-payment. The high court directed payment of just 36 crore, considering the unjust nature of the additions.

Large refunds are held up and delayed till beyond March end, though the refunds may have been determined. Various excuses are given—the system is often blamed for the issue, since refunds are now system-driven, with only the initiation of the process being carried out by the assessing officer. Therefore, instead of individual officers now holding up refunds, you have a centralized system which controls the flow of refunds, with no access for the taxpayer to find out the reasons for the delay. Not all taxpayers can resort to writ petitions to get their refunds, as a couple of large corporates were forced to do.

Weekly targets are set for each commissioner’s charge to carry out surveys of taxpayers, by visiting their premises. Pressure is put on such surveyed taxpayers to pay more advance taxes than are actually due. Public sector undertakings and other large corporates are regularly told to pay more advance tax than is actually due, so that the targets can be achieved.

Appellate commissioners are also involved in the effort to meet tax collection targets. They are encouraged through incentives to dispose of appeals speedily. Speed, rather than delivery of justice, is the criterion to judge their performance. Fortunately, the Bombay high court thwarted an attempt to incentivize appellate commissioners who increased the tax demands made by the tax officers while disposing of the appeals.

The worst part is that targets are set for each commissioner to launch prosecution against taxpayers, with taxpayers then being encouraged to opt for compounding of offences. The compounding fees, which are substantial, would then help meet the tax collection targets. This results in even minor offences or genuine mistakes inviting threats of prosecution.

Under such circumstances, is it not surprising that taxpayers feel pressurized and harassed? Through such pressures, the tax authorities are really killing the goose which lays the golden eggs. To address this issue, the government needs to tackle the root cause—do away with unrealistic tax collection targets, and make tax collection targets more in tune with the economic reality. How can tax collections be expected to grow at 17.5% when the economy is growing at below 5%, and that too in a year when corporate tax rates are significantly reduced, particularly for large taxpaying corporates, such as banks and FMCG companies, from 35% to 25%?

What is the reason for setting such unrealistic tax collection targets? It is driven by the need to meet large expenditures of the government, including salaries and interest, and the cost of various schemes.

It is perhaps high time that the government takes a hard look at its expenditure, cuts down unnecessary flab and spending, and aligns expenditure with a realistic estimate of tax collection, rather than trying to boost tax collection by artificial means to meet the substantial increase in the proposed expenditures.

This government has been extremely bold in carrying out long overdue reforms in various areas. Would the government decide to tackle this fundamental reform head on in this year’s budget? One can only hope and pray on behalf of all taxpayers that this does happen sooner rather than later, as this one fundamental reform can do away with a large number of ills of our tax system. This reform would be far better than a new income tax law.

Gautam Nayak is a chartered accountant

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