Tags:
Journalism of Courage
Finance Minister P. Chidambaram has instructed the tax authorities to go after companies and individuals who are not paying their taxes. His tough talking is welcome, but not enough. Deeper questions need to be asked about why India sees such high levels of tax evasion. It is the tax structure and administration that is at fault. A tax payer8217;s decision to evade taxes is driven by the costs and benefits of doing so. His benefit is the saved hassle, the saved taxes, and his cost is the probability of getting caught and the penalties thereafter. If he believes that the probability of getting caught is low, he is more likely to conceal his income. The strategy for greater compliance, that seems to work successfully in other countries, is to address this issue at both ends. For one, the benefits of tax evasion need to be brought down by reducing marginal tax rates. It is now well understood that the peak rate of 97.75 in 8217;73-8217;74 fostered the black economy and turned ordinary citizens into law-breakers. Even though a highly progressive tax schedule may seem appealing to some, it reduces compliance, which undermines the effective impact on equity. Chidambaram had reduced rates in his 8216;Dream Budget8217; of 8217;97 and is expected to take this further when he implements the Kelkar Task Force proposals.
A clear place to make progress is to remove special cases, loopholes and exemptions. A simple tax code is the best tax code, both for the government and the people. With good information management, the job of filing will become easy for citizens, and the job of verification will become easy for the government. This calls for IT systems where information can be cross-checked. It should be possible to cross-check the authenticity of TDS certificates. The proposed Risk Intelligence Network RIN will look for consistency between the information about a company known to the income tax authorities, versus the excise authorities, versus the information being given to shareholders. Evaders are likely to have left a telltale trace of contradictions in this information, which can alert tax sleuths.
