Transparent Taxation– Honouring the Honest

1. Naturally Honest Citizens: Those who are by nature honest and cannot perpetrate or practice tax evasion. Even if the Government prescribes 99% as the tax rate, they would rather pay the tax due and sleep peacefully than to attempt evasion. Needless to mention that this category is a small percentage of taxpayers.
2. Habitual Evaders: Those who by nature are dishonest and by culture cannot subject themselves to tax compliance attitude. Even if the Government specifies 1% as the tax rate, they would rather question why should that 1% be paid and ponder on how to circumvent the law. It goes without saying that this segment of tax payers are also a minority.
3. The Fence Sitters: In between the above two extremes, there is a vast population of citizens who are fence sitters. If the rates are reasonable, if there are no procedural hassles, if there is a proper counselling and guidance by the tax advisor and if there is no harassment and corruption by some people in the tax department substantial number of these citizens would come forward to pay the taxes by disclosing their income voluntarily and truthfully. On the contrary, if the entire system is not conducive enough to induce them to pay taxes, they would be tempted to evade taxes.

Pillar 1: Equitable and Fair Law

India made a progressive approach to bring down the stiff taxes to a moderate level and that improved the tax compliance. But during the last one decade the trend got reversed by imposing Education cess, surcharge and super rich surcharge resulting in pushing the maximum slab rate for an individual from 30% to 43%. In fact, Government should think of implementing Laffer curve theory whereby beyond a point, cutting the tax rates maximises the collection of taxes. Similarly, it is unfair to tax partnership firms at 35% when Companies enjoy an effective tax rate ranging from 17% to 25%. Though, this gap is neutralised with the taxation of dividend in the hands of shareholders, still, when an entity to entity is compared, it does not present a fair proposition.

Steep tax rates contribute to increase in tax evasion. When tax evasion is rampant, then corruption gets fuelled and that leads to generation of black money and growth of parallel economy. This in turn impacts on the global rating in ease of doing business. India was at 142nd rank about six years ago. Then we improved to 130, later to 100, then to 77 and now we are ranked at 63rd position among 190 economies. Besides, for the consecutive third year, India earned a place among the world’s top 10 improvers, thanks to series of reforms brought out by the Government, including the tax reforms. We can further improve, if the measures launched by the Hon’ble Prime Minister are implemented in the right spirit.

Pillar 2: Implementation of Law

Government should always ensure that those who honestly pay taxes are not harassed during the course of implementation of the tax law. Unfortunately, the past experience has been not so good for the honest tax payers. Not only that honest tax payers were harassed in the course of assessment and appellate proceedings, it is disgusting to find that tax evaders are able to escape the clutches of the tax net due to prevalent corrupt practices. It would be unfair to attribute this observation as applicable to the entire tax department. There are straight forward and honest Officials in the tax department who serve with patriotism and deal with taxpayers in a friendly manner. But like honest tax payers, they are also not a significant percentage. This scenario must change. The Tax payer charter therefore rightly emphasis that the department shall hold its authorities accountable for their actions besides publishing standards for service delivery in a periodic manner.

There is a trust deficit in the relationship between the tax administrator and the tax payer. This must be rebuilt carefully and gradually. In this context, it is heartening to note that as part of the taxpayers’ expectation and department’s obligation, it is mentioned in the charter that the department shall provide prompt, courteous and professional assistance in all dealings with the taxpayer and the department shall treat every taxpayer as honest unless there is a reason to believe otherwise. No law is as good as it is enacted. It is only as good as it is implemented. A good law badly implemented can be disastrous. There are instances where an honest tax payer is compelled to generate black money (undisclosed income) only to meet the demands of the corrupt officials. This creates a vicious cycle in which he gets trapped. Let us hope that the tenets spelt out in the taxpayers’ charter are faithfully practised and truly implemented by the income-tax department upholding the spirit underlying the document.

Pillar 3: Dealing with Tax Evaders (Carrot & Stick Approach)

Tax evaders must be severely dealt with. The carrot approach for tax evaders, in order to incentivise them to pay taxes, can be achieved by allowing a percentage of the tax paid for one assessment year as a deduction in the immediate subsequent assessment year. This type of a deduction, if allowed, would remove the aversion in their mind towards taxes. They would start looking at taxes as they are looking at Chapter VIA deductions in the computation of income. Further, when any bonafide additional demand is raised in the assessment, instead of agitating the matter in frivolous appeal, the tendency would be to pay the taxes demanded as anyway a % of that would be allowed as a deduction next year. In another sense, the cost of compliance would appear more economical and prudent than the cost of litigation.

Gone are the days when a person can spend huge amounts in cash hoping that it would never be found out by the department. First of all, thanks to the evolution of internet and mobile Banking and Platforms like UPI being available, the economy is moving towards less cash transactions with the ultimate objective of achieving a cash less environment. Post demonetisation digital banking gained prominence and now its usage has been accelerated by the Covid caused pandemic situation. Secondly, the Department is also using AI and Data analytics to identify cases of potential tax evasion and initiate proceedings to bring them into tax net. Under the provisions of Section 285BA of the Income-tax Act, reports from Banks, Financial Institutions and other specified persons are expected to flow in to the tax department through their reports indicating transactions exceeding certain threshold limits in terms of investments and expenses.

Now the scope of coverage has been widened to rope in outgoings such as educational fees, donations, hotel bills, purchase of Jewellery, marbles, electricity, health insurance premium, share transactions etc., which exceeds the prescribed threshold limits. By virtue of the revised Form 26AS notified from July, 2020, such specified financial transactions would be made available to the taxpayer so that he could cross check whether the source for all those transactions are duly covered while filing the return of income. The law has also been amended to require the compulsory filing of the return of income by a person having bank transactions over ₹ 30 lakhs; person paying rent over ₹ 40,000 and all professionals and businessmen having turnover over ₹ 50 lakhs. Any arrangement, which lacks commercial substance and devised exclusively with the intent of obtaining tax benefit shall be dealt seriously. In this direction, the provisions of General Anti-Avoidance Rules (GAAR) would serve as a deterrent in the minds of habitual tax evaders, if implemented with right spirit.

Detecting and punishing a tax evader is as much important as recognising and honouring the honest tax payer. Actually, that is one way the honest tax payer’s attitude gets vindicated and reinforces his conviction for faithful compliance of law.

“Post demonetisation digital banking gained prominence and now its usage has been accelerated by the Covid caused pandemic situation. Secondly, the Department is also using AI and Data analytics to identify cases of potential tax evasion and initiate proceedings to bring them into tax net.”

Pillar 4: Culture of Tax Compliance

While the rights of the tax payers become the obligations of the department, the duties of the taxpayers become the department’s expectations from the taxpayers and therefore, rightly enlisted in the taxpayers’ charter. In a nutshell, taxpayers are expected to make honest disclosures, ensure faithful compliance, abreast of the duties and be diligent to seek assistance of the department, maintain accurate records, monitor and know the authorised representative’s submissions, respond in a timely manner to the department besides paying taxes within the due dates stipulated under law.

This is an area where we, the煞Chartered Accountants, must play a vital role in educating and advising the taxpayers to disclose income truly and fully and comply with the provisions of law. None of our clients should face the humiliation of being imposed with any penalty nor they should be subjected to any prosecution proceedings. They must pay taxes with national pride and sleep peacefully having fulfilled the patriotic duty. We must guide the taxpayers to realise that tax evasion is not only illegal but it is also immoral and ultimately will lead to unpalatable consequences. Even tax avoidance through sham or artificial transactions is untenable.

Tax planning through genuine and real transactions within the four corners of law only is valid. While every tax payer can arrange his affairs with a view to avail lawfully permissible deductions and exemptions, no one should resort to sham or fictitious transactions or dubious methods to indulge in evasion. Tax payers must be made to appreciate, as Justice Holmes observed, that we pay taxes to buy civilization. Unless those who have the legal obligation to pay taxes, honestly complies with it, the Government will not be able to provide the best of infrastructure and facilities for enhancing the quality of life. Government exchequer needs money for implementing social schemes meant for upliftment of the poor and to pave the way for socio-economic development of our country. Thus, collective and honest compliance of tax culture is the need of the hour.

“The law has also been amended to require the compulsory filing of the return of income by a person having bank transactions over ₹ 30 lakhs; person paying rent over ₹ 40,000 and all professionals and businessmen having turnover over ₹ 50 lakhs.”

Pillar 5: Honouring of Honest Taxpayers

In the recent years, one of the measures adopted by the CBDT is to recognise taxpayers by issuing certificates indicating the status as “Platinum Taxpayer”; “Gold Taxpayer” and “Silver Taxpayer” depending on the amount of taxes paid for a particular assessment year. While this is a welcome measure, in the emerging scenario, something more should be innovatively conceptualised and implemented. For example, a taxpayer who has contributed more than one crore rupees and recognised as a platinum category tax payer must be entitled for certain benefits and concessions in certain common facilities (for example, access to airport lounges) and must be given a preferential treatment in granting approvals and even in standing in queues for checking in at the airport flight counters. So, for each of these categories of tax payers, such entitlements may serve as a recognition and incentive for their tax compliance. Others would be inspired to see these kinds of benefits being given to the honest taxpayers and may be motivated to emulate them. These benefits may also be extended to assessees, who have efficiently complied with the TDS/TCS provisions, CSR obligations etc.

In the light of the faceless assessment mechanism put in place there will not be personal hearing or enquiry except in select cases such as search cases, serious fraud cases, major tax evasion cases, international taxation cases and cases where the provisions of Black Money Act and Benami Property related law are invoked. Even territorial allocation of cases is done away with in the faceless assessment. All these, I am sure would remove human interface and prevent corruption. These measures in a way indirectly relieve the honest taxpayers of mental stress because subjectivity and harassment would be eliminated. Having said that, it is important for the tax department to impart knowledge to their officers, through robust training and make them understand on the intricacies of contemporary business and transaction models, which would certainly avoid unreasonable assessments, high-pitched demands and prolonged litigation, during the times of faceless assessments.

“They must pay taxes with national pride and sleep peacefully having fulfilled the patriotic duty. We must guide the taxpayers to realise that tax evasion is not only illegal but it is also immoral and ultimately will lead to unpalatable consequences.”

Pillar 6: Usage of Taxpayers’ Money

Due to the law being fair and equitable, implementation being judicious and taxpayer friendly, we can certainly expect significant transformation in the mindset of the people towards tax compliance. Similarly, if the dishonest persons are detected and punished that would be deterrent for those who wish to indulge in evasive measures. On the other hand, if honest taxpayers are given due recognition and certain visible benefits, there would be motivation for them as well as others who get inspired by them to pay taxes properly. So, all these measures shall cumulatively enhance the tax payers population by improving the culture of compliance in a calibrated manner.

But what can sustain that positive frame of mind is the Government demonstrating to the people that it is diligently and faithfully using the taxes collected for the inclusive growth and for the socio-economic development of the Nation. When people experience that the quality of life and the modes of transportation, communication, power supply are most efficient and that goods and services including public utilities are made available at affordable cost for the common man, then everyone would come forward to contribute the taxes. When the taxpayers find that whatever they are paying is coming back to them either in the form of good infrastructure or it is getting deployed for upliftment of the downtrodden by poverty alleviation, free medical facilities and education for those who can’t afford them, the citizen’s pride in contributing to the Government exchequer would be immeasurable.