1. Black money fight: Here’s how to deal with tax evaders and delinquent officials

Black money fight: Here’s how to deal with tax evaders and delinquent officials

The government needs to focus on incentivising voluntary compliance with tax laws, economic growth and institutional development

Published: January 11, 2017 6:21 AM
Tax One, tax evaders and delinquent officials are more likely to be discouraged from abusing their position if they feel that the chances of their being caught and quickly punished are high. (Source: Reuters)

“You would either laugh or get enraged,” pointed out the PM, “if I were to tell you that only 24 lakh people in this country admit to earning more than Rs 10 lakh per month.” He was absolutely correct: 70 years after independence, when our economy grows at more than 7% per annum even during a slowdown, only 1.53% of the population files returns and pays tax; this figure includes corporate entities as well. For corruption, the position continues to be equally bad. During 2014-15, India’s position improved from 85 to 76 in Transparency International rankings.

That the PM invariably mentions both black money and corruption in the same breath is not coincidental. It springs from an intuition that they are both somehow deeply inter-connected. Both spring from the lack of honesty and trust; and both feed on each other.

In the past, governments have sought to tackle this twin menace with the help of draconian legislation. The Income-tax Act for example is replete with provisions relating to powers of search and seizure, surveys, stringent penalties and prosecutions. Similarly, to fight corruption, the government created Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI)in 1964, and enacted the Prevention of Corruption Act in 1988. Both enactments turn conventional jurisprudence on its head. They reverse the burden of proof—requiring the accused to prove her innocence; and treat even lapses with stringent pecuniary penalties attached to them as civil rather than criminal or quasi-criminal offences. CBI’s conviction rate is less than 6%; and very few people file returns and pay tax.

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Even though it appears to have been sincere in its efforts, the present government appears to be be carrying forward the earlier approach. Over the last two and half years, it has enacted the Undisclosed Foreign Income and Assets Act and the Benami Transactions Prohibition (Amendment) Act. But finally, when all this did not yield results, it resorted to demonetisation. Somewhere implicit in this whole approach lies the romantic hope—often nurtured by statists and leftist thinkers —that tough laws and vast discretionary powers to officials will deter people from acting dishonestly.

Nothing could be further from the truth. Government must realise that its current approach has severe limitations: It has already put in place a decent legal infrastructure to deal with these evils. This is as far as it needs to go. It need not try and reinvent the wheel. There is no need, to encourage citizens to spy on fellow citizens and report instances of tax evasion and corruption. This approach has been tried earlier and leads to a large number of frivolous complaints. It is also reminiscent of the Emergency and a police state. Instead, a large body of inter-disciplinary research, offers important lessons.

One, tax evaders and delinquent officials are more likely to be discouraged from abusing their position if they feel that the chances of their being caught and quickly punished are high. Thus, speed and certainty of action are better deterrents than quantum and severity of penalty.

Two, when certain conduct is widespread and societal in nature, governments should think many times before they criminalise it. Corruption in a culture—be it India, China, Russia, South Korea, Bangladesh, Nepal or Pakistan— is a reflection of a historical trajectory. People do respond to incentives and disincentives within a system and when these change, behaviour too undergoes a modification. South Korea, for example, successfully digitised commercial transactions by offering suitable tax breaks. In our own country too, more could be done to promote compliance with laws. The government could simplify and demystify laws and procedure, provide better taxpayer services, introduce GST expeditiously, reduce litigation, and curtail discretion of bureaucrats.

Three, what distinguishes developed from developing countries is the quality of their institutions. In developed countries, institutions generally possess a higher degree of internal accountability and are much more successful in delivering planned outcomes; in poor countries, on the other hand, institutions often lack this capacity; and effective governance is a scarce resource. Building institutional capability assumes importance.

Four, since there are very few quick solutions development seems to be one of the most promising remedies to pursue. Per-capita income in a country offers one of the best explanations for its level of corruption. Higher the per capita income, lower, generally is the level of corruption. We should not forget that a country which sacrifices growth for revenue gets neither growth nor revenue.

“If voluntary compliance in your country is low,” remarked my professor on fiscal psychology at Bath University many years ago, “perhaps you should be given less not more powers. As in any country, more power to you will only result in abuse.”

Hardayal Singh

The author was chief commissioner, I-T and ombudsman to the I-T department, Mumbai

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