Taxation with tears

A word about the difference between these two terms. Tax avoidance refers to exploitation of loopholes in the system and throughthem an attempt to reduce tax liability. In a way, it is intelligent tax planning without causing infringement of law. Tax evasion, however, implies a deliberate attempt at non-payment of taxes, hiding or misdeclaring the taxation base.

In India we face the serious problem of both tax avoidance and tax evasion. Tax avoidance is not considered something immoral. In fact, companies and businesses employ the services of legal experts and tax consultants who devise ingenious arguments to reduce tax liability, yet compatible with law.

At times, tax avoidance is perceived as an attempt to evade taxes. This leads to dispute and litigation. It is also often complained that overzealous tax officials confuse genuine tax planning with tax evasion. It is said that many a time the tax officials contemptuously stretch the disputes without offering timely advice to the government to introduce corrective legislative changes to plug loopholes in the law. Many times changes are made only on the culmination of protractedlitigation. It is not uncommon that disputes are raised with the ulterior motive of postponing the devil’s due.

Tax evasion is a more serious problem. Besides causing a loss to the exchequer, it is unethical and immoral. Also, it is widespread, encompassing practically all sections of the society. In the Indian context, the problem of tax evasion seems to emanate from a certain mindset, deep-rooted perceptions, attitudes and practices.

Most of the transactions of sale and purchase are not recorded, specially in the case of retail business. This results in evasion of indirect taxes like the retail sales tax. Manipulation of sales and income figures results in a loss of income tax revenue. The attitude of the public also contributes to this. Not many really insist on a cash memo, despite the advice of consumer forums.

At times, the customer is influenced by the fear that he will have to pay more by way of price if a cash memo is demanded. Many customers seriously doubt whether the amount recovered assales tax would ultimately go to the government account. They hold a strong perception that, by paying a higher price including the sales tax, they are only enriching the shopkeeper.

Coming to direct taxes, income and wages earned by millions is not accounted for or recorded adequately. In such a situation, suppression of income is as easy as widespread. It has obtained the tacit sanction of the society. No eyebrows are raised, if the income earned is grossly under-declared in the tax returns or no returns are filed. Sadly, the affluence of a person is determined by the amount of defiance he shows for the tax laws.

Social practices, too, induce tax evasion. The society does not distinguish between white money and black money. “Money has only one colour,” is the usual contemptuous remark passed on one who attempts to preach morality.Consider another social evil dowry. How many are afraid of demanding dowry? Yes, there is an anti-dowry law. But the less said about its effectiveness, the better. Its fateis akin to that of a `statutory warning’ pri-nted on every packet of cigarette, not even seen by smokers.

Take another gro-und reality. An honest taxpayer or tax-evader, everyone needs a house to live in. If you want a house on rent, prudent advice is not to waste your time unless you have fat money to pay as pagri or advance deposit without asking for any receipt. And if you are thinking of purchasing a flat in a town or city, the difference between the actual price and the receipt price is mind-boggling. What happens if you want to sell property? How many can avoid the greed of the `real price’, most of which is offered as black money?

Questioning certain socially accepted practices may only turn out to be bad manners. For instance, it may not be proper to ask a doctor whether his fees may be paid by cheque.

Lack of enforcement has also contributed in a big way to tax evasion. True, detection of tax evasion implies tax recovery, payment of interest and penalty. However, many have a strong belief thatone can always find avaricious tax officials who require only a fraction of that.

Grotesquely burdensome and monstrous tax systems have also a deleterious effect on tax compliance. In not too distant a past, more than 90 per cent of income earned was taken away as tax. However, old habits die hard. Even after the tax rates are reduced to reasonable levels, people have to be exhorted to realise that sound sleep is good for health!

The problem of tax evasion is also aggravated by the widely held perception that the revenues earned by the government are not utilised properly and not the whole of it is utilised for public good. Think of the oft-quoted statement by late Rajiv Gandhi on the actual benefit that seems to reach the people out of the money sanctioned on public expenditure. A large section of the population holds in contempt the disgusting civic amenities provided by the authorities and government agencies, little realising that they can be improved only by higher tax realisations.

At times, thetax liability is also reduced with the connivance of tax officials. The fact that many others, placed in similar situation, do not pay taxes also encourages tax evasion. Attempts to unearth tax evasion by groups of businesses are thwarted by mass resistance and protests. The poor credibility of the tax departments comes in handy on such occasionsTax evasion is really a social problem with serious manifestations. The pity, however, is that black seems to shine brighter than white.

The writer is Joint Secretary in the Ministry of Finance. The views expressed are his own