India might be one of the world’s fastest-growing economies in the world, but it is a fact that only about 3% of its people currently pay income tax, and all government efforts to increase tax compliance and tax base have failed to bear much fruit until now. Although new tax payers increased by 26.6% from 66.53 lakh in 2015-16 to 84.21 lakh in 2016-17, led by the demonetisation of high-value notes, however, is that enough? Have you ever wondered why a large number of people in India are still reluctant to pay tax? One key reason is that they believe that they get nothing in return, like social security or other benefits, even if they pay tax or more tax than others, which may not be entirely true.
Whatever be the case, tax experts believe that salaried individuals are largely in compliance with the tax regime, as the tax on the salary income is deducted at source by the employer. Similarly, income earned by individual tax payers like interest income on bank deposits above specified threshold is subject to tax withholding and automatically gets reported to tax authorities by banks.
“The challenge sometimes lies in case of income earned by individuals from business and profession. There are various reasons for perceived non-compliance, including high rates of taxes, fear of scrutiny and too much information collation in case of assessment proceedings, time and effort involved in meeting compliance requirements, pro-longed litigation etc. Also, culturally over decades, people have developed the habit of being non-compliant with tax regulations and lack of strong enforcement has only added to this issue. Therefore, we can say that to some extent it is a combination of mindset issue in the society and lack of fear of law enforcement,” says Vikas Vasal, Partner & National Leader-Tax, Grant Thornton India LLP.
How can tax compliance be increased?
Tax experts say that in India the overall awareness on taxes is low. People are not educated enough to understand that the taxes they pay will ultimately lead to the nation’s growth and hence contribute to the overall well-being. “There are a lot of facilities that the common man needs today and these need huge investments. Taxes contribute a considerable portion to this and hence need to be paid regularly by all taxpayers,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Indians will pay more taxes once they are made aware of how tax money is used, which is already being done by the government through various advertisements and awareness programmes, but more needs to be done. “Also, people need to be encouraged through non-intrusive measures to meet their tax obligations and any clear cases of tax evasion need to be dealt strongly with to send a message. At the same time, it should be ensured that genuine tax payers are not deterred in this process,” says Vasal.
Experts also believe that providing social security will encourage more and more people to pay tax as they will believe that they are getting something in return. In fact, “generally in a country where the government is able to provide a strong social security system, people are less worried about any eventuality and have lesser concerns to accumulate huge sums for the same,” says Chandak.
Another aspect that requires attention is that though at policy level a lot of positive changes have been introduced, the experience at the ground level continues to be the same and this needs to change. Thankfully, “a number of initiatives have been taken by the government in the recent past and the results will be visible over time. These include linking of Aadhaar with PAN, mobile phones, bank accounts etc. Further, with the introduction of GST, hopefully once things settle down, we should see more and more businesses coming under the tax net. Similarly, post demonetization, there has been an increase in the number of individual tax compliances,” says Vasal.
Some tax experts believe that although in the past few years the government has taken significant steps to increase the overall tax payers’ bases and bring down effective tax rates, there is still a lot to do in this regard. “By taking certain bold measures like demonetization, digitization, Aadhaar implementation, direct benefit transfer, and GST implementation, the current government has proved that it has the will and zeal to take the things to the next level. However, if it wishes to bring more and more taxpayers in the tax net, it will have to focus more on digital economy, reducing corruption and bringing down the tax rates (both direct and indirect),” observes Chandak.
Digitization will help the government in plugging the tax evasion, increasing revenue collection and reducing the tax rate. The reduced tax rate in turn can help the government to boost the voluntary compliance by taxpayers, resulting in further growth in tax collection.
“It has generally been observed that if the tax rates are brought down, the tax compliance increases; and in the Indian context hopefully the tax collections would also increase. Therefore, Budget 2018 may be a good opportunity for the government to trend this path and reduce the tax rates,” says Vasal.
However, will that happen? That remains to be seen.