Bihar shows how to make taxes simple

Font Size

Print

Feedback

Email

Discuss

• Discount UK Shopping

: lump sum tax payment of Rs 10,000 for those in the turnover band of Rs 10-25 lakh; Rs 30,000 for those in the turnover band of Rs 25-40 lakh. It would require a simple one-time, annual return. Most importantly, no scrutiny or inspection. The main reason surveyed businesses cited for not wanting to register for tax is harassment by tax officials. This model, by specifying lump sum payment, and doing away with mandatory 100% scrutiny, takes away the discretionary power from the hands of the tax officials and reduces scope for rent seeking.

However, is a simple regime sufficient incentive for small businesses to register? Probably not. The Bihar model seeks to further incentivise small, informal, non-taxpaying businesses to register for tax and join the economic mainstream by also providing help with other critical small business needs: access to finance, insurance and market information.

The proposal is to set up Laghu Kardata Seva Kendras that would, in addition to providing tax services to small taxpayers, facilitate loans from banks and financial institutions for the businesses that register for tax. The Kendras will also help small businesses get in touch with insurance providers and avail insurance services for their businesses. It is also envisaged that other services, such as provision of market information, would also be provided by these Kendras. It is proposed that these centres be set up as a public-private partnership, with a private or non-government organisation working with the commercial tax department to establish the Kendras.

As the survey conducted in Bihar shows, it is estimated that there are as many firms not registered for VAT as there are that are registered. Given about 1,20,000 registered firms, the same number of firms have turnovers above the threshold but remain outside the tax net. If the small taxpayer scheme proposed by the model is successful in attracting new registrants, there exists a huge potential for increasing formalisation in Bihar; at least the estimated 1,00,000-odd firms that are today choosing to stay informal are potential formalisers. To the extent formal firms have greater access to finance and hold out a much greater promise for future growth, the

Bihar model for VAT administration can be a very useful instrument of industrial and economic growth and generation of employment.