In India, no impact assessment is
carried out before changing tax laws, says S Mahalingam, member of the tax
reforms commission Indian taxpayers have a litany of woes to relate about the
tax system, ranging from arbitrary tax demands and high-handed behaviour, to
complex and vaguely worded tax laws. Firms have also been complaining about
rising instances of ‘tax terrorism’ which have rendered the country unfriendly
to business. It was in this backdrop that the Tax Administration Reforms
Commission (TARC), headed by Parthasarathi Shome, was constituted in August 2013.
The committee had suggested far-reaching changes for a customer-focussed tax regime
in India. S Mahalingam, a member of the Commission and former CFO of Tata Consultancy
Services, spoke at length to Business Line on the impactful report.
Excerpts from the
interview:
One of the
fundamental changes suggested in the report is the abolition of post of Revenue
Secretary. You recommend that the powers be vested with the CBDT and CBEC. Why?
The Revenue Secretary usually comes from
the civil services and thus brings with him little experience or familiarity
with tax laws and administration, particularly international practices, which
are increasingly central to tax policy. Yet he finally signs off on all the key
policy decisions of the department. Usually, he tends to focus on the
administrative aspects, rather than modernising the tax system. To oversee the
tax administration, we have instead suggested a Governing Council to oversee
the two Boards, with representatives from the industry as well.
Our interactions showed that there is
phenomenal capability within the tax department on policy formulation. Good
policy cannot be formulated without analysis and experience. This cannot come
about if you rotate officers arbitrarily every three years. Tax officers must
be allowed to develop specialisation in their respective fields. There is a
need for augmenting their decisions with data. So we are not just against generalists
at the Revenue Secretary level, we are against them at all levels.
The report strongly
criticises aggressive revenue forecasts made in the annual Budget, which are
often missed. It notes it is the unachievable targets set for tax officers that
often results in ‘tax terrorism’. How can this be addressed?
When you formulate policies that affect
so many taxpayers, they need to be backed by rigorous analysis of data. But
such analysis seems to be completely absent in India. No impact assessment is
carried out before changing tax laws. Nor is there any assessment of costs or
benefits after the change is implemented. This is a key reason why the tax
system completely lacks customer focus.
Take the simple case of tax projections
which are made each year in the Budget. They are often unrealistic. Yet this
becomes the target which percolates down the department. In March, the
department holds back refunds due to taxpayers or calls them up asking for higher
advance tax payments. This is quite a flawed approach to tax collections. Yes,
you may be meeting the number, but at the expense of taxpayer interests. Tax
projections need to be backed by analysis. If you are assuming a certain tax
buoyancy based on a certain GDP growth, it is necessary to go back into the
components of that GDP growth to see if the projections are realistic. If it is
agriculture which is contributing to growth in a specific year, that will not
lead to tax buoyancy. But today, such projections are made without really using
the rich data that is available with the tax department because there is no
systematic data warehousing, data mining or people who can ask the right questions.
Therefore, tax projections end up looking like simple excel sheet forecasts, backed
by no real data.
While India has just 20 people engaged
in analytics in the tax department, the UK has 400. There is a great need for
capacity building in this area. We have advocated a Tax Council to help in
formulation of tax policy and related legislation, to be headed by the
government’s Chief Economic Advisor. We have suggested the setting up of a
knowledge, analysis and intelligence centre which can help in forecasting, data
analytics and research.
TARC has recommended
a merger of the CBEC and CBDT functions, especially for large taxpayers. Given
that one deals with transactions and another with income, what are the
synergies between the
two?
The separation of the CBDT from the CBEC
is essentially an artificial distinction. Combining the two can lead to
generation of rich sectoral data which can be used to formulate better tax
policies. Globally, most countries have unified their direct and indirect tax
regimes, so that they can be treated holistically as ‘business’ taxes. Sharing
information on businesses can lead to higher tax collections. It will ensure
people don’t make arbitrage out of information asymmetry. We found that a GST
pilot project in Maharashtra which put together the CBDT and CBEC databases to
generate comprehensive profiles, helped collect ₹500 crore of VAT from traders who evaded it.
India’s low tax base
has been a long-standing problem. Why is it that initiatives like tracking
high-value transactions or insisting on PAN cards for more transactions have
not worked?
True. Take direct taxes, for instance.
While direct tax collections have increased by over 700 per cent in the
last ten years, the number of taxpayers has only increased by 35 per cent.
The taxpayers in the lowest income slab of up to ₹5 lakh make up 98.3 per cent of the total taxpayers. They
contribute only 10 per cent of the tax revenues. This suggests that the tax
base is extremely narrow. This has to do with systematic data capture
and monitoring. To give a simplistic example, if I am running an
organisation like TCS, which has 3.5 lakh employees, I need to know three things.
How many employees have attended office today? How many are productive? And how
many are getting billed? If I don’t know these basic things, the organisation
cannot function effectively.
The tax department needs a similar
framework. If there is a high value transaction taking place that should lead
to the right questions on who were the parties involved, what the value was and
what were the taxes paid. The TARC did a simplistic analysis to say it is possible
to increase the tax base to 6 crore from the present 3.5 crore. But this is not
easy. You need a holistic system-driven approach to drive the expansion in tax
base.
Why is there a
continuing disconnect between what the government says and what the tax department
does? For instance, this government did make an assurance that it would not act
on retrospective tax amendment. Yet Cairn India has been slapped with a
retrospective tax demand.
Retrospective tax demands are
undesirable. But this can only be explained by the pressure to generate
revenues. There is a genuine need to fund India’s welfare and infrastructure programmes.
And if the fiscal deficit targets are not met, and borrowings get out of hand, you
are essentially mortgaging the future to fund the present. But to generate
revenues, leakages have to be plugged systematically and you need to plan how
you will meet your revenue targets. To give a reassurance on ‘no retrospective
taxation’ when alternative revenue sources haven’t been found, is not realistic.
This is why there is a need to think through revenue targets more carefully. To
cite one instance, transfer pricing officers in India are given tax targets!
Now, a transfer pricing officer is meant to basically avoid evasion and clarify
rules on transfer pricing, by deciding where the value addition in a business
is happening. Once you give him a target to meet, he is bound to take the most
extreme position. So if you simply take last year’s revenues and increase it by
X percentage, it is not an appropriate way to set revenue targets. This leads
to unhealthy practices, litigation and when the Court rules against you, you
again resort to another spurious amendment.
The report flags the
problem of in fructuous tax demands, stating that the Indian tax department has
one of the worst recovery records in the world. Why does this happen?
Indian tax laws tend to be loosely
drafted and open to interpretation. This is because you don’t have specialists
drafting the law. Moreover, tax changes are often done in a hurry with little
or no analysis or impact assessment. That is why it is critical that the tax
department acquires the specialisation to draft the law. Specialisation will
help the department win more cases too. Currently, the tax department also
often loses out, not because their case is per se weak, but because the
assesses can often hire specialist lawyers who fight the case for years.
Whereas, departmental lawyers keep changing and the tax officer who is familiar
with the case may be transferred too. The dispute resolution mechanism needs to
improve too; the department must engage with the assessee before the issue is
taken to the Courts.
Corruption is an
often cited complaint with the department. Would curbing the discretionary
powers to the assessing officer help?
There is bound to be some discretion.
But if your administrative systems are working very well, it is possible to
reduce the face-to-face meetings between tax officers and taxpayers. This can
reduce corruption. Systematic handling of them through dispute resolution centres
can also reduce opportunities for corrupt practices. Ultimately, it is very
difficult to discourage a person who wants to be corrupt, but you can reduce
the number of avenues and enhance systemic interventions. When talking of
corruption, the role of vigilance also has to come under scrutiny. For instance,
we met an honest officer whose career was ruined for 15 years, because of charges
that were never proved. The investigation just goes on and on and the file
never gets closed. Corruption cannot be brought down by vigilance alone, you
need analytics too.
Why has the
simplification and rationalisation of the tax structure come to a halt in
recent years? Instead of fewer slabs and exemptions, we seem to be adding on
more slabs, more surcharges, cesses and more complexity.
If we had a large tax base, a simpler
system can be administered. But we don’t, so revenue pressures force the
government to tap as many sources as possible. What we need is impact analysis.
After any new tax is imposed, if we had an evaluation of the impact on revenues
vis-à-vis compliance costs to the taxpayer, we would be able to eliminate taxes
that don’t work. But because there is no such assessment, taxes that have no
business to exist continue for years, even as new taxes get added. This is what
the Tax Council can
look at. It can bring in the business
perspective that is essential to evaluate such measures.
TARC’s report is an
unusually detailed and comprehensive report. But usually there is a tendency to
cherry-pick recommendations from such reports and implements them partially.
What would be your comment on this?
If you want to get rid of tax terrorism,
you have to fundamentally transform India’s tax administration. You cannot do
it through incremental changes. To cite an example, to reduce disputes, you
cannot simply create more posts of full-time commissioners in the department.
You need to analyse why disputes arise, create dispute resolution mechanisms
and frame the laws in a more water-tight manner. If you do not approach it in that
fashion, you cannot succeed.
The importance of the people aspects,
brought out in the report, cannot be over emphasised. Our interactions showed
that the tax department has completely lost its spirit. It needs to be
restored. As one senior officer told me: “If you are mistreated by your employer,
how will you deal fairly with the taxpayer?” To me, that did seem to have the
ring of truth. Tax officers need to be better equipped through training,
empowered by their boards and given the ability to build expertise and
specialisation. Finally, you need to get out of this system of setting unhealthy
revenue targets which are not based on reality. To do this, you need effective
ICT use and powerful analytics. On collections, you should not be wasting your
resources going after people who are already compliant. You need to go after
people who are sitting on the fence.
What we have suggested is a complete
systemic overhaul of the tax administration. Mere tinkering will not be enough.
We have not stopped with recommending changes alone. We have also outlined the
manner in which you can bring about the change. We have outlined the need for
immediate action and created timelines for achievement of different objectives.
We also travelled across India to talk to tax department officials to get their
feedback to the report. This is a unique report, in my view, because of the
coming together of people with exceptional experience and expertise. Dr Shome
has brought in extraordinary perspective in terms of his own rich experience in
tax administration and laws, as well the practices around the world that we can
adopt in India. The report is also practical because of the active
participation of two former chairmen, and two former members of CBEC and CBDT, apart
from representatives like me and MR Diwakar from the private sector.
S Mahalingam is an Independent Director
on the Board of Kasturi & Sons, the publishers of
BusinessLine
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