New tax mantra: Fear is the key


There is a clear message being sent out by the tax authorities: tax evasion (like smoking) is at your own risk

Anil Padmanabhan 

Recently, the income-tax department put out a new tax returns form, which makes life for tax evaders, potentially, that much tougher. Coming as it does in the backdrop of new legislation that targets black money held abroad, there is a clear message being sent out by the tax authorities: tax evasion (like smoking) is at your own risk.

Among other things, it requires a person filing income-tax returns to disclose their passport number, all active bank accounts and their Aadhaar number—the last is not mandatory, for now.

Its earlier effort in April had to be hastily retracted after a severe backlash against clauses requiring disclosure of all foreign trips along with the expenses incurred abroad and the cash balances in each of the bank accounts.

On the face of it, the new form looks like a climbdown, but is it? Potentially, the tax authorities have the desired personal specs, if not the details, which can be easily accessed in the event of a scrutiny.Three things jump out immediately.

First, this is another important step towards creating a rules-based regime (and, hopefully, the beginning of the end of an era where it was the done thing to ridicule those honestly abiding by the law—like paying taxes or waiting at red lights).

Systemic change
The new taxreturn forms will compel people to disclose all their sources of income

Second, it is reflective of the systemic effort undertaken over the last decade and more to create an audit trail for the taxman to trace in the event of any infraction. They have done so by creating a tax information system that is slowly and steadily connecting all the dots generated by financial transactions.

Third, the authorities have to begin educating the tax sleuths in the use of such an information network. Given the history of misuse, this is actually an imperative and not a choice.

In any society, there are rules. Either driven by your sense of civic duty, you voluntarily abide by these rules or do so under the fear of recrimination for any violations. It is not that in India there was no rule for paying taxes owed to the government. It was just that the threat of a crackdown was not credible as the authorities rarely had access to a tax information system that was comprehensive
and reliable.

So what transpired was a best of the worst. People preferred to evade taxes, even as the administration, vested with immense discretionary powers, unleashed endless harassment. In many ways, they fed off each other, resulting in a punitive system in which there was no incentive to pay taxes.

The genesis of the present transformation began with the tax reforms, incrementally at first, initiated relatively recently. The big makeover came about after an expert group headed by former finance secretary Vijay Kelkar turned in its reform blueprint for direct taxes. The report argued for a win-win situation for taxpayers as well as the tax administration; it proposed to do this by creating a transparent, trust-based system defined by clear rules that eschews discretion. This was the birth of the tax information network. “We have sought to replace the present “exemption raj” with a tax system that is outcome-oriented rather than input aligned—wherein higher productivity of income taxpayers and increased profitability of businesses is encouraged. This is the case with the most
dynamic countries among the emerging markets,” the report argued.

These changes have, over the years, created a tax information network—where even the direct and indirect tax wings of the government share information. It has worked, but partially. The entire exercise was to broaden and deepen the pool of taxpayers in the country as the economy transformed—remember, India was about a $400 billion economy at the turn of the millennium and is now measured at $1.98 trillion.
Yet, the number of taxpayers in the country has hardly grown; at present, it is estimated at 4.8 crore—less than 3 percent of the country’s population. In comparison, in the US, nearly half the population pays taxes.

This brings us back to our story of the tax administration’s new mantra.

They have started setting up intersecting audit trails, creating a convenient tax GPS that can be easily tracked. Progressively, they are making tax evasion tougher.

Here is a list (by no means exhaustive):
—A 360-degree profiling of taxpayers by matching their direct and indirect tax payments,
—Tracking credit card payments, cash deposits in banks, purchase of tax-saving instruments using PAN,
—Seeding of Aadhaar with the PAN database to weed out duplicate PANs,
—Buyer of an immovable property exceeding a value of `50 lakh has to deduct tax deducted at source, or TDS, at 1 percent, and
—Making PAN mandatory for all transactions of sale and purchase over `1 lakh.

There is every reason to believe that this trend will only accelerate. And this is not something specific to the National Democratic Alliance—all previous regimes have been equally committed, but may have dithered on the pace of change. Implicitly, therefore, there is consensus.

The only note of caution for the authorities is that there is only a fine line between compliance and enforcement—after all, the honest have every right to not
live in fear.

—The writer is deputy managing editor of Mint