Tighten tax administration to augment revenues

The ever-increasing globalisation has put two significant challenges relating to taxation in developing countries. Firstly, the developing economies need to have their tax laws and tax administrators geared up to meet the challenges of the new-world trades. Secondly, the developing economies’ ever increasing need to augment higher tax revenues given the current economic situation. This has led to many developing countries beginning to restructure their tax systems.

In India, the tax administration is faced with multiple challenges including the lack of resources and capacity for building effective tax collection systems. The administrators also need to evolve to deal with the emerging tax issues such cross-border taxation, e-commerce taxation, interpretation of double tax avoidance agreements, and so on. The fast changing world with newer concepts and increased business complexities, a low tax-GDP ratio and pressure on tax collections has led to increased litigation. The Union Government has taken certain steps in the right direction to make the tax administration more effective. Some of the measures that have been adopted is to increase the reliance on indirect taxes (especially service tax), to increase withholding tax compliances and also computerisation of the tax system. The last few years have seen striking enhancement in the working of tax departments. Corporate taxpayers file their returns electronically and make payments of taxes only electronically. The amount of information (including the latest circulars, and so on) which is available on the departmental Web sites is noteworthy.

Resources available

The steps taken by the Government in the recent years have improved both the physical and intellectual resources available to the tax administrators. The tax officers are getting access to world-class trainings institutes, visiting faculties from international taxation bodies have added to the intellectual resources available, increased computerisation, better offices and latest communication systems have added to the physical resources available to the tax administrators.

While Budget proposals traditionally focus on widening tax bases, revision of rate structures, and so on, to augment revenues, the Finance Minister could do well to continue the efforts to make the tax administration more efficient to achieve the same objective. There exists a positive correlation between tax administration and revenue collection.

Recently, the Finance Minister was speaking to reporters after inaugurating the Centralised Processing Cell (CPC) of the Income Tax Department in New Delhi. The CPC, a technology-driven tax administration, would assist the tax deductor, tax collector and also the payee, he said. Though there are many steps taken in the right direction, the question is whether all these measures are enough for a fast growing economy like India. On the eve of the Budget, while there are many murmurs as to how will the fiscal deficit be managed, whether taxes will be increased or expenditure would be curtailed, the potential long term solution without hindering growth could be better tax administration and compliance and further amendment which facilitates this will be most welcome.

(The author is Partner and Co-head –Tax, KPMG in India.)

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