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Boosting Voluntary Tax Compliance through reforms
Overview – Compliance in taxation and evaluation of the reform measures taken by the Government.
Tax Collections will be severely hit because of the economic contraction caused by the COVID-19 pandemic. With a shrinking tax base, any calibration of rates or the tax base is difficult since a hurried approach can have wider consequences. So, it seems that the government needs to maintain its tax base through voluntary compliance. Historically, India is achieving compliance to taxes through a fine balance between enforcement and encouragement. However, the tax base has remained stagnant at around 6% of the population. Thus, the only way to boost collections is to build trust between the administration and the taxpayer.
Tax Compliance and the Importance of Trust:
Tax Compliance is a function of the perception of the administration. Perceived complexity can discourage individuals from filing returns. There is a 20% gap between taxpayers and returns filed which reflects complexity of the tax regime. With the lower withholding rate this year on certain incomes, it is important that taxpayers file their returns on time so that the government can meet its expenditure duties.
How can this trust be built?
The government has announced measures to usher in transparency in the system. This includes changes in the taxpayer’s charter and faceless assessments.
Evaluation of the Measures:
- Changes in tax charter: India has introduced changes into its new charter. The changes include:
- It includes certain rights such as confidentiality, right to representation and fair treatment. These are in line with global practices.
- There is a commitment to reducing compliance costsin administering tax legislation, holding its authorities accountable and publishing a periodic report of service standards.
Criticism of the changes:
- The details of how these will be put to practice have not been spelt out.
- Ideally, a tax ombudsman can ensure that some of these standards are met. However, the cabinet approved the abolition of the quasi-judicial postin 2019.
- Several countries like the UK and Canadahave also tried to build trust for voluntary compliance through charters. However, since charters cannot be enforced, the success is limited.
- Faceless Assessment:
This has been done to automate the case selection and the distribution function of the assessing officer. The intent of this initiative is to divest and distribute the functions of a single assessing officer so that assessment is carried out in a fair manner.
Criticism of the move:
While this can perhaps alleviate concerns of possible corruption, other concerns remain.
- Tax returns can be voluminous and the information contained therein can be unique. Therefore, taxpayers must ideally have an opportunity to explain their casein person.
- Further, for smoother functioning of the new system, swift coordination is necessary among various units.
Inconsistent and delayed decisions have often led to the poor success rate of the tax department in dispute resolution. If the commitment to a fair and impartial system and a time-bound resolution of matters is to be met, the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.
Source: The Indian Express
- Can changes in the tax charter and faceless assessment of taxes brought in by the government ensure robust tax collection? Critically analyse.