How tax compliance can be scaled up

The following part of Prime Minister Modi’s recent interview to Times Now has revived the ancient debate on tax compliance: “In the last five years, more than 1.5 crore cars have been sold in the country. Over three crore Indians went abroad for work or travel. But the situation is that only 1.5 crore people in our country of more than 130 crore pay income tax. Of this, only three lakh people have declared their annual income over ₹50 lakh. Furthermore, only 2,200 professionals, including scientists, engineers, chartered accountants and Bollywood actors, declared their income above ₹1 crore. Such is the state of affairs in India.”

The Week magazine has countered these claims of Prime Minister Modi with the following: “According to the data released by income tax department in October 2019, there were 49,128 taxpayers with salaried income of more than ₹1 crore in India during the assessment year 2018-19. It is to be noted that the ‘professionals’ segment that the PM talked about falls under the ‘salaried income’ category. At the same time, the total number of individuals earning more than ₹1 crore per annum was 97,689 during the same period.”

But then Prime Minister Modi’s lament is not devoid of truth. BJP’s enfant terrible Subramanian Swami’s solution — abolish income tax as farmers don’t pay any, rich avoid a substantial sliver of it and only the middle class pays it — would amount to throwing the baby with the bathwater.

Direct taxes are a necessity in a civilised economy. Accent on indirect taxes (GST) and on revenue from auction of natural resources are not only regressive but counterproductive too. Be that as it may, but Modi seems to have given the solution to the festering problem of poor tax compliance in the course of his lament. Cars and foreign travel stood out in his eyes as visible signs of latent income.

Economic criteria scheme

Indeed it stood out in the eyes of some South American governments led by Columbia, famous then for levying income tax on the basis of visible signs of wealth. Former Finance Minister P Chidambaram, while not falling headlong for the Columbian model, embraced it partially when he mandated the economic criteria scheme under which those travelling abroad, those owning a car, those having a telephone connection and those owning a 600 square feet house property were all called upon to file their income tax returns mandatorily no matter whether they had income or not.

The idea was good but as it happens, the follow-up measures were inadequate, lax and tardy resulting in the flood of returns gathering dust in lavatories of the income-tax department.

Wealth tax

The human tendency is to flaunt wealth — palatial houses, swanky cars, obscenely lavish weddings and glittering jewellery to name a few. Income tax sleuths should stir out of their ivory towers and fan into pockets of such affluence with the aid of municipal records, RTOs and wealth tax returns. Wealth tax has a dual purpose — garnering revenue for the government and acting as bulwark against income tax evasion.

Alas, the late Arun Jaitley had not thrown it with the bathwater — his rationale for abolishing wealth tax was it was hardly fetching ₹1,500 crore by way of revenue. What he should have done instead is to target all assets as against only six assets then, with a generous exemption thrown in for residential properties. That would have given more revenue besides allowing the assessing officer to examine income tax return in juxtaposition with wealth tax return in order to pounce on the assessees in case of discrepancies and abnormalities.

The Modi government has to learn to look to a comprehensive direct taxes code that comprises income tax, wealth tax and estate duty.

The writer is a Chennai-based chartered accountant

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