If there’s one wing of the Government that most Indians love to hate, it is surely the tax administration. Only about 4.3 crore citizens of the teeming 130 crore population file their income tax returns.
And most of these taxpayers, you can be sure, relish their interactions with the taxman about as much as they look forward to a visit to the dentist.
The feeling is mutual. The tax administration also seems quite convinced that citizens, left to themselves, like nothing better than dreaming up creative ways to evade tax. This atmosphere of mutual distrust has escalated after the Modi regime redoubled its efforts to unearth black money. It has unleashed a tsunami of demand notices, scrutiny assessments and raids.
But given that governments have been trying out the ‘stick’ approach to improving tax collections for ages, with limited success, it is time to try out carrots for a change. Since voluntary taxpayers are such a rare breed in India, why not reward them and make role models out of them?
There’s nothing quite as thrilling as winning the lottery. Many governments across the world have realised that giving taxpayers a special shot at a lottery can help collections and also serve as a good PR exercise for the tax department, at a modest budget.
The tiny nation of Malta has been running a popular lottery since 1997. Taxpayers submit physical and electronic VAT receipts to the department of Lotto, which holds a public draw on the 15th of every month. The lucky winner bags a cash prize amounting to 100 times the tax paid and multiple prizes are given away until the monthly budget is exhausted.
In November 2017, beleaguered Greece kicked off a €1000 tax jackpot for small businesses, raking in over 8.2 million entries. Such VAT lottery schemes, also run in Taiwan, Slovakia and Portugal, don’t just help with compliance.
They also spark greater citizen interaction with the tax administration. Why shouldn’t India try out a lottery for e-filers of income tax? If a nationwide one is difficult to run, it can be attempted zone-wise.
Fostering feel-good
One reason why many Indians hate to pay taxes is that they see very little evidence that the money is being put to good use. As the Budget reminds us every year, much of the tax money goes to servicing interest payouts or salaries and perks for the babus. There’s also leakage and corruption in public spending. But if you knew that a part of your tax was guaranteed to be used for a cause dear to you, would you feel better paying it? You probably would.
Since 2008, Japan has been running a hometown donation scheme ( furusato nozei ) by which taxpayers can earmark a part of their taxes to support a hometown of their choice.
The donation, which is handed over to the chosen local government after a flat deduction, entitles the taxpayer to an equivalent tax break on property tax and national income tax — the ceiling rises with one’s income.
Japanese media reports estimate that hometown tax donations have jumped from 10 billion yen at the start to over 200 billion yen by 2016, playing a big role in reconstruction efforts after the 2011 earthquake.
India also runs a battery of cesses that are supposedly earmarked for social causes — Education Cess, Swachh Bharat Cess, Krishi Kalyan Cess, Infrastructure Cess, etc. But these are swallowed up by the Consolidated Fund of India, with few disclosures on whether they’ve served their stated purpose.
Instead, we can do away with the multiple cesses and just run one earmarked tax at a time. The Government should share real-time data on how the cess is being spent. There is a ready template in the PM Ujjwala Yojana, where citizens who voluntarily give up their LPG subsidy can actively track new gas connections to BPL households.
Discounts and cash-backs
As Indians interacting with the taxman, we all know that bad behaviour can be severely punished, but there are no brownie points for good behaviour. Failure to pay your quarterly instalments of advance tax on time attracts a penal interest of 1 per cent per month. Late filing of IT returns beyond July 31 attracts a penalty of ₹5,000 or ₹10,000. In some cases, the taxman is empowered to subject an evader to imprisonment.
But suppose you’re the extremely meticulous type and pay your advance tax instalments a month before the deadline. You also file your IT returns early to avoid the last-minute scramble. Can you hope for a reward? You should be able to!
Given that early payment of taxes by assessees can help the IT department earn interest on the extra float, tax rules can easily be tweaked to offer a cash-back of say, 2 per cent, to early payers of advance tax. Early-bird return filers must be rewarded too, given the Indian fetish for leaving everything to the last-minute, leading to meltdowns on the e-filing site at the nth hour. How about a discount on taxes which is directly proportionate to how early you file your returns?
Rewards for toppers
Finance ministers often bemoan the fact that India has too few high-value taxpayers. But why would there be more, considering the disproportionate burden they bear?
According to CBDT’s recent data, just 1216 taxpayers declared an income of over ₹100 crore in FY15. These civic-minded individuals, however, chipped in 24 per cent of the entire year’s income tax collection of ₹33 lakh crore. This matched the tax that 2.7 crore people at the bottom of the pyramid scrounged up. Apart from income differentials, this skew is explained by India’s Robin-Hood style tax slabs, where the highest income bracket entails a 31 per cent income tax, as well as surcharge and dividend tax.
But if the tax department were to look at those top-bracket taxpayers as its most valued customers, it would extend the privileged customer treatment to them.
There’s a move to issue appreciation certificates to all large taxpayers this year. But what about a platinum taxpayer card that entitles these folk to free passes or reserved bookings on Air India or Indian Railways? Coming to think of it, why not allow all income taxpayers to accumulate reward points for every rupee of tax paid, which they can redeem against government services?