Income tax targets of 20% forget that GDP grows at 5%

Income tax targets of 20% forget that GDP grows at 5%

Unless the government changes its method of accounting, the economy and taxpayers will be sufferers

 

These days there are so many news reports of large amounts of income tax litigation in the newspapers that you would be wondering as to whether there has been a sudden spurt in tax evasion. Even when it comes to scrutiny assessments of individual taxpayers, who have earned substantial amounts of income, significant additions are made to the returned income, resulting in litigation.

This seems surprising, as most people would testify that the number of taxpayers indulging in tax evasion has actually reduced over the past couple of decades in percentage terms, as witnessed by the reduction of black money in various markets, including the real estate market.

Similarly, one would expect that persons filing income tax returns disclosing a substantial amount of income are really honest taxpayers.

What then is the real reason for this sudden increase in income tax litigation? When one talks to revenue officials, one realises that a part of this litigation is on account of better enforcement and better information available with the tax department due to computerisation, which is definitely a welcome development, acting as an effective deterrent to tax evasion.

However, when one analyses the issues arising in such litigation, it seems that the major part is on account of the fact that tax authorities have also been taking fairly aggressive stands in recent times, even on issues settled by the higher courts, effectively trying to negate the earlier decisions.

Newer controversies are being raked up by tax officials, even though they seem to be highly contentious. Therefore, even if a taxpayer wants to comply with the law and avoid litigation, he is still likely to face litigation as he may be confronted with controversies not even envisaged by him at the assessment stage, or which he thought were settled issues.

Is such an aggressive stand by tax authorities desirable? Tax authorities are a part of the government, and therefore have to be fair in their approach towards taxpayers. The government has significantly higher resources than most taxpayers, and does not incur any significant additional costs for such litigation, unlike a taxpayer who has to bear legal costs for such litigation. Therefore, taxpayers are at a significant disadvantage when it comes to tax litigation.

Further, the law has been amended over the years to the detriment of taxpayers, whereby a taxpayer is required to pay 50% of the tax demand before her appeal is heard. Very often, even when the demand is ridiculously high, a taxpayer has to run from pillar to post to try and obtain a stay on recovery of the tax, which he often just cannot afford to pay. To try and bulldoze taxpayers into paying higher taxes not justified by the law is not a desirable approach for any government.

Such litigious approach of the tax authorities could have a negative impact on tax compliance, as well as acting as a dampener to business. Therefore, it seems to be reaching a situation where such aggressive tax posturing may result in short-term gains in the form of higher tax collection, but will cause significant long-term damage to the country and to the tax collection.

The root cause of this aggressive stand by tax authorities clearly seems to be the high tax collection growth targets set by the government, which are unachievable without resort to such aggressive stands and harsh measures.

The sufferers are the existing taxpayers, as not many efforts are being made by tax authorities to rope in new taxpayers. If the Indian economy is growing at 5%, how can the income of taxpayers grow by 20% to match tax collection growth targets of 20%? Unfortunately, the government follows the cash method of accounting whereby whatever taxes are collected by it are recognised as its income, irrespective of whether such taxes are disputed or may be refundable at a future date.

Therefore, there is a significant incentive to collect tax today, though it may be refundable a few years later after the appeals are disposed of. This also creates an incentive to delay refunds as much as possible, so as to boost tax collection targets.

Unless the government either changes its method of accounting for taxes by not taking into account as income any disputed taxes which may be refundable in future, or fixes more reasonable tax targets, the Indian economy and Indian taxpayers will be the sufferers.

The government has set up a Tax Administrative Reforms Commission headed by Parthasarathi Shome. One hopes that this commission will take cognizance of this unhealthy practice and recommend changes to this practice, and that such recommendations are adopted by the government, so that taxpayers can pay their legitimate taxes without having to worry about unwarranted litigation.
Rahul kumar Gupta
PGDM 1 st Year..