For a taxpayer-taxman chemistry

The legislation provides a challenge to policy-makers and economic administrators. It is expected that the realisation of the deficit rule can be substantially achieved by an effective and efficient revenue enhancement programme. The target of revenue deficit as percentage of GDP is stipulated at 2.5% for 2004-05, to be reduced to 1.1% for 2006-07. The tax GDP ratio which is currently at 9.2% is proposed to be enhanced to 12.1%. These targets are based on the assumed average annual growth of direct taxes at 26% and indirect taxes at 19%.

The composition of central government tax revenue has undergone significant change since economic reforms were introduced. The share of direct tax in total tax revenue has increased from 19.1% in 1990-91 to 39% in 2003-04 and corresponding share of indirect tax has fallen from 78.4% to nearly 61%. This structural shift being a part of the fiscal correction strategy provides a challenge as well as a concern for the direct tax administration in India.

Some issues need to be addressed for long-term sustainability of direct taxes as a growing and reliable contributor of tax revenue. The first pertains to numerous exemptions, incentives, rebates and reliefs under the Income Tax Act, which distorts the incidence of taxation, widening the gap between nominal and effective rate of taxation. The ability to benefit from different exemptions vary across various assessee groups, the salaried and fixed income groups being most disadvantageously placed. This leads to the system being perceived as inequitable. This needs to be addressed by rationalising the plethora of exemptions, making it less vulnerable to misuse.

The current strategy to increase revenue through widening of tax base has two aspects. First, to bring more people into the tax net, and second, to bring in more unreported and under-reported income to the purview of taxation. The numerical increase in the tax base is intended to be achieved through voluntary compliance. The second aspect is more critical and requires more focused attention. The under-reporting of income is largely a vexed issue, which has to be tackled by pursuing a vigorous system of scrutiny, laying down detailed disclosure norms in tax audit, fixing accountability on both the auditors and the assesses, and simplifying tax laws. More than under-reporting, the issue of bringing unreported income poses a greater challenge.

A large number of transactions although recorded in various channels like banking escape the notice of tax authority. The existing laws provide for calling assessee-specific information and there is no system of collecting transaction-related information and pooling them from various sources. Various laws like the Banking Secrecy Act are cited for not supplying the desired information. Any effort to tackle tax evasion would require a mechanism for access to various transaction-related information, checking whether they are reported and recorded. Therefore, a non-discretionary third-party system of collecting information and matching should be evolved whereby specified information of transaction from various sources should flow in for pooled storage, retrieval and verification by the tax authorities with least interface with the potential assesses.

Another issue of concern is the functional efficiency of tax administration. The tax administration essentially involves two aspects, process functions and knowledge-based functions. The scope of process functions is innumerable and covers various stages which are routine and require large-scale automation and computerisation. This requires a massive configuration of software and hardware, collaboration and integration between various functional units and networking.

As regards knowledge-based functions, it is essentially ability-enabled. Tax administration involving assessment, investigation and appellate stage requires specialised knowledge whose application would depend on the nature and complexities of the cases. The pattern of general administration cannot be replicated in tax administration. Informed and judicious application of mind comes out of the background of an officer, training inputs, his ability to comprehend and visualise the issues involved and experience in the field.

The officer-oriented tax administration has a large, able and experienced cadre. What is required is a balanced alignment of the ability of a functional unit of the department, with the complexities of the cases at different stages of handling. In case this alignment is not well-positioned, it would result in gross under-utilisation/ mis-utilisation of the functional competence of the department. Cases need to be suitably categorised on certain parameters and be dealt by officers at different levels of seniority or grade.

This balancing will result in better utilisation of the human resources and make the system more effective and accountable. This balancing, diluted and eroded after the cadre restructuring, needs to be restored and strengthened. The functioning of tax administration cannot be based on the assumption of case neutrality, which is largely the case now.

The writer is an IRS Officer. These are his personal views