In late 2002, when the then Finance Minister, Jaswant Singh, signalled the beginning of a radically new approach to taxation, marked by simplification and rationalisation, the Finance Ministry undertook a review of the format of tax returns. Tax return forms in those days used to be lengthy — running into perhaps 10 pages. The story goes that when senior Revenue Department officials showed a sample of the proposed new ‘Saral’ form for individual taxpayers to Singh, the Minister was upset enough to demand to know what exactly was saral (simple) about the new form, forcing the officials to scramble to make the form simpler.
A few months later, in his Budget for 2003-04, Singh unveiled several measures to create what he said was a modern, forward-looking, revenue-beneficial taxation system. They included the introduction of a one-page return form for individual taxpayers, abolition of the discretionary system for selection of tax returns for scrutiny and its replacement by a computer-generated random selection of only 2% of returns annually, and the direct crediting of refunds to the taxpayer’s bank account.
Beginning of the idea
Around this same time, the government, based on the recommendation of a group headed by Vijay Kelkar, the Adviser to the Finance Minister, and in line with the broader aim of building an impersonal tax system free of individual discretion, decided to use technology to develop a Tax Information Network (TIN). Over 15 years later, the results are clearly visible.
The government now plans to offer pre-filled Income-Tax returns using the data available with the Income-Tax Department from firms who deduct tax at source from their employees, and banks and other agencies. This was a recommendation made by the Tax Administration Reforms Commission appointed during the UPA government’s term under Dr Parthasarathi Shome, who had worked with the Revenue Department of the government of the United Kingdom. The Commission suggested that pre-filled tax returns be provided to all individuals with the option of accepting the return or modifying it suitably. This was in line with global best practices, and had its focus on the delivery of taxpayer services.
Arguments for, against
Tax compliance, or the voluntary filing of tax returns, has improved over the past decade. Of the 6.84 crore I-T returns filed in 2017-18, e-filings were 6.75 crore. With over 98% e-filings, India is ahead of the United States, where this number is reckoned to be below 90%. And as the country has moved to a Naya Saral, scrutiny of tax returns is now less than 0.5% of all returns filed.
Besides representing a move towards global best practices, pre-filled forms could be a potentially enabling measure to foster a tax regime based on trust. There is, however, a view in the Tax Department that it may be too early to migrate to this simplified system because of information asymmetry — unlike in countries like the United States or United Kingdom, the Department may not have access to full information on all the sources of an individual’s income. And if the taxpayer is made aware of this asymmetry, the chances of evasion of tax or non-compliance are bound to rise higher.
Simply put, revealing all the cards through a pre-filled tax form without commensurate improvement in compliance could be counterproductive for the Department, argue the sceptics. Thanks to the TIN, a lot of gaps in data quality have been addressed, but the incomplete task makes a case for postponing the introduction of the pre-filled form, according to this view.
Choosing the right path
In the UK, Her Majesty’s Revenue and Customs offers an automated assistant to help taxpayers. The UK Revenue Department’s tax delivery services are reflected in its charter of rights and obligations. The Department says that it respects the taxpayer and treats her as honest, and promises to provide helpful, efficient, and effective service. In return, it expects from taxpayers reciprocal honesty and respect for tax officials, and an effort to work with them to get things right.
The Integrated E-filing and Centralised Processing Centre 2.0 project cleared by the Cabinet at an estimated cost of Rs 4,242 crore may be aimed at realising similar goals in India. Like in the case of the I-T Department’s project one and a half decades ago, Infosys will again anchor it. According to the government, the project will cut the time for processing I-T returns to one day from 63, lead to faster refunds, and promote voluntary compliance.
On compliance, the Shome Committee had this to say: “In the ultimate analysis, under no circumstances should a taxpayer be allowed to hide for his entire productive life as a non-filer or in the comforting embrace of an unduly favourable presumptive taxation system. Progressive assimiliation should be not only through education, but also through increased risk perception regarding the likehood of penalties being imposed.”
In his Budget speech delivered on February 28, 2003, Jaswant Singh said: “Mr Speaker, Sir, this will be a move away from a suspicion-ridden, harassment generating, coercion-inclined regime to a trust-based ‘green channel’ system. I do this entirely on the basis of my faith in my countrymen and women.”
Few Ministers have articulated the need for a revamp as strongly as Singh did then. There has been considerable progress in the years that followed, but the depth of the commitment to the “trust” and “faith” that Singh spoke of, remains to be fully tested.