The carrot for tax compliance

The tax department’s various initiatives to coax individuals to pay taxes haven’t succeeded in the past.

This time too, making on-time return filing a status symbol might not work

Direct tax collections increased 10.5 per cent to around Rs 3 lakh crore (Rs 3 trillion) in April-September, the first six months of the financial year.

In the same period last year, collections totalled Rs 2.72 lakh crore (Rs 2.72 trillion).

The finance ministry has fixed the direct tax collection target at Rs 6.5 lakh crore (Rs 6.5 trillion) for 2013-14, expecting a 19 per cent increase over 2012-13.

There is a fear that the collection target might not be met. Among other reasons is no reduction in the number of non-filers and evaders, especially when it comes to filing wealth tax.

Experts say only three per cent individuals pay taxes.

Of this number, the government earns more than half from those earning Rs 20-25 lakh (Rs 2-2.5 million) or more, annually.

Officially, there are only 42,800 individuals in the department’s records who have declared taxable income of over Rs 1 crore (Rs 10 million).

To meet the target and get more individuals under the tax net, the government has been active over the past year.

It recently sent ‘polite’ letters to some 40,000 individuals, asking whether they had filed returns.

The government is also looking at other ways.

“The ministry is planning multiple steps to widen the net for direct tax collection, one of which is giving a status symbol to filers.

“The idea is to make them feel proud and be looked up to, for having filed returns on time,” said an I-T official, who did not wish to be named.

This was tried earlier, too.

For instance, declaring advance taxes filed by businesses, companies, film stars and so on.

Many of them were felicitated for paying high amounts as tax.

Both central and state governments felicitate individuals. In 2010-11, the Tamil Nadu government felicitated Lakshmi Narayanan, vice-chairman, Cognizant Technology Solutions, as the highest individual taxpayer.

Shriram Transport was declared the highest taxpayer in the corporate sector.

Then, there was a Voluntary Disclosure of Income Scheme launched by the Central Board of Direct Taxes in June 1997.

VDIS provided defaulters an opportunity to disclose income at the prevailing tax rates, with immunity from prosecution under major economic offences laws — Foreign Exchange Regulation Act, the I-T Act, Wealth Tax Act and Companies Act. The scheme closed in December 1997. VDIS was expected to get an exceptional response. It did get a fair share but did not succeed the way it was meant to.

“VDIS made an impression that individuals could escape paying taxes today and come out clean without any penalty when the government would again come back with such a scheme.

“The aim was something else,” explains Ashvin Parekh, managing partner, APAS LLP and senior expert advisor, global financial services, EY.

Many individuals waited for such a scheme in the coming years and sat back to save on interest penalty.

The finance minister announced a Voluntary Compliance Encouragement Scheme for service tax defaulters in the Budget this year.

It came into effect from May 10 and a declaration can be made till December 31.

The ministry plans to target 1.2 million assesses who had stopped filing returns.

Parekh says in 2007-08, there was another scheme where anyone owning at least one of six items -- television set, radio set, refrigerator, telephone, car, house -- had to disclose this.

The department would investigate if the person had paid taxes, filed returns or not.

“This was a tedious task. In 2007-08, even those in the lowest income bracket had refrigerators and television sets.

“The department got many declarations but it hardly got back to anyone. The disclosure was never asked for again,” he says.

Similarly, the other schemes saw some traction in the initial months but did not continue.

“Which common man will be felicitated for being the highest taxpayer?

Therefore, why should they bother if they pay taxes or file returns on time or not?

These schemes cannot work in India because there is a lack of trust between taxpayers and the department,” says the tax official.

There has to be a trust deficit because of the way the department works, complains a chartered accountant.

“One of my high net worth clients who’d paid Rs 25 lakh as tax in 2008-09 was called for questioning in 2011-12.

“He was left after he showed all his documents but that left a bitter taste in his mouth,” he recalls.

As for the carrot of status symbol, senior corporate tax lawyer H P Ranina feels it will need to be chalked out well.

“What does status symbol mean?

Till a taxpayer knows the advantages, how will he be lured to it?

The very fact that the tax department sends notices to those spending more than Rs 200,000 by credit card when it should allow it and curb huge cash transactions talks volumes,” he regrets.

S R Wadhwa, former commissioner of the Income Tax Settlement Commission, says the issue is evasion by high income earners.

Therefore, instead of giving a status symbol to one and all, have a threshold of income above Rs 1 crore (Rs 10 million). That might work better.

GOVERNMENT INITIATIVES AND WHY THEY DIDN’T SUCCEED

• Declaring Advance Taxes Paid

It works for those paying bigger amounts. Small taxpayers know they will never be able to pay that much; hence, they don't bother

• Central and/or state government felicitation for paying taxes

Again, it works for big-ticket taxpayers; small taxpayers are mostly indifferent

• Voluntary disclosure of income scheme

Gave an impression that individuals could escape tax payment and would be given a chance every year to come clean without having to pay any penalty

• Declaration of certain assets to verify tax payment

It involved disclosing household items that were common across the taxpayer base and, hence, was looked at as unnecessary paperwork. The tax department could not keep pace with the declarations made and the scheme was discontinued.

• Making tax returns a status symbol

It might not succeed because the incentives needs to be defined clearly. Hence, it could be difficult to lure taxpayers