It is a fact that only a small percentage of Indians file tax returns and pays tax. Multiple reasons could be assigned to it like lack of awareness, complex procedures, lack of stringent penalties for non-compliance and fear of long drawn disputes or litigation.
If the interface between the tax collector and tax payer could be minimised and processes made more transparent, then this would help in building the confidence of the tax payers. To begin with, like PAN, refund process should be automated and outsourced. Guidelines should be laid out as to the timeframe within which the refunds would be credited into the bank of the tax payer. Any delay should be compensated with interest at commercial borrowing rates.
In case of a revenue audit, invariably a questionnaire containing a long list of documentary requirements is issued to the tax payer. This is followed by explanation for most of the items in the bank statement and other documents, which is sufficient to scare away the tax payer. On the other hand, tax authorities also have to collate the information in respect of income, expenditure and investments to ensure that correct income has been offered to tax. In this context a different approach could be adopted, which is a transaction based audit.
At present, under annual information reporting system, information about some transactions are submitted by independent agencies like mutual fund investments and property transactions above specified limits etc.
More similar commercial transactions could be brought under the network. Afterwards, any particular transaction, which in the opinion of the tax authorities is not commensurate with the income levels of the tax payer, could be investigated in detail instead of the present detailed audit process. As a first step, this could be adopted for individual tax payers having non-business income.
If the tax payer is aggrieved by an order passed by the assessing officer, then he has to follow the appeal process, as specified. This is again a long drawn battle and a common tax payer finds it difficult to contest his case.
At the first stage itself, if the appeal could be addressed by a panel consisting of representatives from revenue authorities, judicial authorities and profession and industry, then it is possible that most cases could be resolved to the mutual satisfaction of the tax payer and tax collector.
Ultimately, the tax collector has to collect tax to meet the larger socio-economic and development needs of the country. The only issue is if this process could be made less painful and more widespread to encourage larger participation in this exercise of nation building. This is evident from the huge increase in absolute number of tax payers as well as tax collections in the last two decades since the time the tax rates have been lowered and procedures simplified. So why not move further in this direction now!
* The author is executive director, KPMG