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Photo: iStock
Photo: iStock

Opinion | We can do away with income tax assessments for most taxpayers

This won’t hurt revenue but would encourage tax compliance and also ease the burden of litigation

In 2012 or so, Columbia University’s professor Jagdish Bhagwati was in Singapore addressing the students and faculty of Lee Kwan Yew School of Public Policy. One of the things he said remains etched in our minds. He said that public policy advocacy was like running a marathon. Some of the things he and his wife Padma Desai had written about in the 1960s played out in the 1990s in India, with the ushering in of a big wave of economic liberalization. Simply put, one has to keep plugging away and be patient. We were reminded of that when policy reforms in the agricultural sector were announced as part of the Aatmanirbhar Bharat package. Several state governments are also initiating long overdue land reforms, such as the conversion and sale of agricultural land for non-agricultural purposes and enabling land leasing, among others.

The Indian economy is at a crossroads. There is a hangover of stress in the financial sector, which is a legacy issue, having been around since the global financial crisis of 2008. Capital formation in the non-financial, non-residential private sector is yet to pick up meaningfully. Fiscal space to rejuvenate economic growth is severely constrained. Then there is a military confrontation at the border with China, from which India imports light manufactured goods (from bottles to pack lip balm). Economic growth disappointed in the last decade. There is a real risk of an encore this decade. The fundamental reforms in the farming sector mark a radical departure from the past, and are the types of actions needed in other areas such as banking, taxation, public health and primary education. In that spirit, we propose that it is time for the Indian government to do away with income-tax assessment.

Recently, the income tax (I-T) department uploaded time series data on taxes in India from 2000-01 to 2018-19. We refer to its Table 1.5 for the purpose of the proposals outlined in this column.

Sunil Jain of Financial Express recently sent a tweet to finance minister Nirmala Sitharaman, saying that the I-T department was following up with him on some assessment notice despite his having complied with it and paid the tax. Many of us have similar experiences on I-T assessments in spite of computerization. To be fair to the department, it should also be emphasized that assessments of a “fishing expedition" nature have come down considerably in the last two years, but more can still be done for the government to bury the charge of “tax terrorism" being deployed as a tool to augment direct tax revenues.

A review of the data in the table referred to above suggests that the I-T department can easily eliminate “tax terrorism". Regular assessments done by the department are yielding only around 8% of the total gross direct tax collected, whereas advance tax, tax deducted at source (TDS), self-assessment tax and other receipts yield around 92%. This shows that voluntary compliance brings in much of the tax collection. Another indicator is the difference between the number of assessees paying tax/TDS and the number of those who have filed returns. The figure is almost 20 million.

Together, these two sets of data make a strong case for abolishing tax assessments for individuals, at least those who have a good compliance record of, say, 10 continuous years. The government could continue with limited scrutiny assessments for corporate taxpayers, with incentives for exemption from assessment if their tax remittance grows at or above a specified rate (say, 15%) every year. This will take care of the tax buoyancy ratio and reduce assessment costs drastically. Our firm conviction is that if assessments are done away with, more small businessmen will choose to pay under the presumptive tax provisions, file their returns, and be at ease.

Further, for the amounts that the department collects through assessments, a large proportion has been contested via appeals filed with various commissioners of income tax, appellate tribunals, high courts and the Supreme Court. Doing away with assessments by the I-T department can substantially avoid unnecessary litigation and reduce the burden on courts. The potential cost savings and productivity gains all round must be considered.

When the proposal was discussed, many expressed a legitimate concern that the Indian public has not yet matured enough to be voluntarily compliant. But that fear is easily addressed. One, will anybody stop deducting TDS if assessments are discontinued? This is deducted by the payer and not the payee. Second, Form 26AS contains all information on TDS and the income earned by the holder of a Permanent Account Number. Third, the government has recourse to artificial intelligence and data analytics tools, and these could nab any assessee who suddenly vanishes from the tax radar. Further, if tax rates are moderate, taxpayers would figure that the trade-off between evading taxes and the risk of getting caught is in favour of paying up. Our proposal, we reiterate, is to do away with assessments only for taxpayers with a continuous compliance record.

The time has come to move from evolutionary change to revolutionary reforms. India’s economic challenges require nothing less to overcome.

V. Anantha Nageswaran and V. Rengaswamy are, respectively, part-time member, Economic Advisory Council to the Prime Minister of India, and former chief financial officer, JK Fenner (India) Ltd. These are the authors’ personal views.

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