By Divakar Vijayasarathy
A digital economy where the number of transactions in cash is lower, tax evasion reduces and compliance improves. The overall tax collection would increase resulting in reduced rates of taxation and improved spending by the government on infrastructure and health.
Regulatory compliance in India is quite complex, but steps are being taken in to improve the same. The introduction of self-assessment and self-certification under various regulations is a step in this direction. Recently simplified income tax returns have also been introduced. Another case in this direction is the introduction of GST – wherein the entire supply chain now has to report the movement of goods in an integrated platform. This would significantly expand voluntary compliance and increase assessee base consequently improving tax collections both at the Centre and State.
A higher compliance ratio, at a macro level across legislations, would improve tax collections and thereby enable the govt to reduce the effective tax rate and, the government would be in a position to take more informed decisions especially the welfare schemes could be directed towards the needy.
Fiscal deficit mainly arises on two counts, either the government increasing the spending more than the budgeted limit or the government is not able realise the budgeted revenue. In India it is mostly because of the later one. The recent fiscal deficit overshoot is due to lower collection of non-tax revenues.
The knee-jerk reaction would be look out for additional sources of revenue by increasing the tax rates. Some governments in order to have a populist view opt for raising debts, which leads to higher interest regime which in turn has various side effects of lower fund flow to equity market, higher inflation of manufactured products, job cuts etc.
(The Author is Founder & Managing Partner, DVS Advisors)