The taxing truth: tax payers need to be rewardedJul 29 2016,
In this world, nothing can be said to be certain except death and taxes,” wrote Benjamin Franklin, one of the founding fathers of the American constitution. What Franklin did not foresee, it seems, is to what extent his global brethren would go to prove him wrong. Indeed if the figures of India’s tax-paying citizens is anything to go by, taxes—if not death—is a fate lots of reasonably well-heeled Indians have been able to avoid.
Despite several efforts by successive governments over the decades since 1947 to boost tax collections, Prime Minister of the country, Narendra Modi, in 2016 still had to take pains to highlight the issue at a recent conference with the country’s taxmen. His target—doubling India’s taxpayer base to 100 million from the present estimates 50 million. To put it into perspective, that’s increasing from 4% of the population to 8%. To be fair to Indians, tax avoidance has been and continues to be a global issue. A combination of carrot and stick has been used by most progressive administrations to widen the tax base and boost collections. Success rates however dramatically differ. In India, during financial year (FY) 2015-16, over 43 million returns were filed as compared to 140 million in the US (where a number of married couples file joint returns).
In the US, the amount of total personal tax receipts for 2015 was over $1,400 billion as against India’s $40 billion. These numbers obviously have to be considered taking into account the differential income levels of both countries but broadly speaking, ability to maximise tax collections has a lot to do with factors beyond income levels of the nation. As such, India being relatively poor by no means becomes an adequate excuse for low taxpayer base. India’s poverty has not come in the way of our becoming one of the world’s biggest markets for a plethora of luxury products from automobiles, luxury homes, high-end mobiles and consumer durables among others. So what are some of the ways that the government can achieve the 100 million taxpayer target in a reasonable time frame?
Continued focus on widening the tax base
A narrow tax base means that a smaller section of the society bears the tax burden. As seen from India’s numbers, 4% pays for 96% thereby increasing attempts to avoid taxes by the unfortunate few who bear the burden.
The percentage contribution by individual tax payers has been almost 50% of taxes paid by corporations or businesses. The taxes collected from individual tax payers for FY15 was approximately $40 billion and that from corporations was $67 billion. These figures are suggestive that taxes paid by individuals contribute way lesser than that by businesses. The indirect tax collection was $222 billion, which is a very high amount as compared to the individual tax collections. However, it is interesting to note here that ultimately the burden of indirect taxes is borne by individuals. The rate of taxes on businesses is also higher as compared to individuals who get the benefit of slab rates. Even then, since the honest tax payers find it burdensome, they look for opportunities to avoid taxes.
It is a vicious situation in which higher taxes prompt people to avoid taxes with more even more energy. In recent years, a move by the British government to tax the richest citizens at a high rate of 50%, has seen a quantum jump in British residents seeking greener (low tax) pastures in other European nations. Instead, the government can consider launching strategic campaigns for building awareness about taxes, for example, by highlighting nation-building contributions and moral obligations.
Treating tax returns as a personal financial resume
The income tax return (ITR) forms need to be shared as powerful personal financial enablers. It’s an important document for buying homes, applying for loans, life insurance, visa applications, among others. Thus, the tax return becomes a powerful financial footprint of the taxpayers’ financial life.
Routing certain social benefits through tax returns
Tax payers need to be provided reliefs in form of tax credits where they can get some refunds basis certain conditions.
In the US, such tax credits are allowed to tax payers who have dependent children below a certain age, or dependent senior parents. These may encourage more people to file taxes returns. The Aadhar is a powerful tool created by the government for providing direct benefits to the poor. Can’t the ITR be one such tool to provide benefits to the middle- and upper-middle classes for their tax compliance? These may be some of the measures that the governments can undertake by drawing inspiration from tax regimes of the developed world. If all goes well, and the 100 million mark is reached, people might start seeing taxes in a good light and become a fulfilling activity for all.
Director, H&R Block India.
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