Tax reforms: Not faceless but a humane face
By Dr. Santosh Kumar Mohapatra*
On August 13, unveiling new tax reforms Prime Minister Narendra Modi launched a new platform; new tax reforms to ease the compliance burden for assessees and honour the honest taxpayers of the country and making tax-paying seamless, painless, faceless. Describing the structural reforms as a new milestone he pointed out that country’s honest taxpayer plays a big role in nation-building. A faceless tax system will give the taxpayer confidence in fairness and fearlessness. The ‘Transparent Taxation – Honoring the Honest’ platform will bring in faceless assessment, faceless appeal, and taxpayers’ charter.
Supporting reforms, finance minister Nirmala Sitharaman said Prime Minister’s tax reforms are to empower the taxpayers, to provide a transparent system, and to honour the honest taxpayers. Faceless assessment and taxpayer’s charter come in force from August 13, whereas faceless appeal service will be available from September 25, which is Deen Dayal Upadhyaya’s birth anniversary. A faceless tax system means faceless as it shouldn’t matter who is paying tax and who is tax officer,” Taxpayers will now be given the respect they deserve. The taxpayer will now be trusted, not looked at with doubt. The tax department will have to carry out the steps and processes in a time-bound manner.
As per the new reforms, faceless appeals aim to add more trust, transparency in the system. Under this, appeals made by a taxpayer will be randomly allotted to any Income Tax officer in the country. The identity of officers deciding appeal will remain unknown. A taxpayer won’t need to visit the officer or the office. The appellate decision will be team-based and reviewed. Under the faceless scheme of assessment, the selection of cases for scrutiny is supposed to be devoid of any human intervention. It will be done randomly and under an automated process.
However, the faceless scheme announced recently is nothing new, but the old e-assessment scheme already in existence with little here and little there modifications. “E-assessment scheme”, was introduced through the budget announcements of 2019. E-assessment was supposed to be a faceless process for assessment without there being any human interface. The faceless appeals and system of assessment, however, will not apply to a certain category of cases such as black money and benami property matters, international taxation cases, serious fraud cases, and tax evasion cases. All the cases covered under income tax raids will also be outside the purview of the faceless assessment scheme.
The Taxpayers’ Charter defines the rights and obligations in a very general term. The concept of Taxpayers’ Charter is not a new thing. The Taxpayer’s Charter has been there, even before 2005. The new Taxpayers’ Charter is not going to change the life of taxpayers significantly in any way. Unless the charter is made legally binding, it will remain only an ornamental piece for display. Earlier taxpayer’s charters were followed more in contravention, violation than in compliance. With the launch of this platform, the claim of the government that the government has taken another step to make the lives of the taxpayers easier means the lives of taxpayers were in thorny, complex, and intricate in past even in last 6 years of Modi’s rule too. The talk of simplification of direct tax laws and increasing transparency in communication is just another humbug to divert the attention of people from real issues like poverty, hunger, unemployment, and inequality and the impact of the novel coronavirus.
However, the country does not need a faceless tax system but a progressive tax system with a humane face that will generate more resources and everybody will be made to pay according to capacity. The rich will be taxed a much higher rate so that more funds will be available for spending in welfare schemes. The structure of a country’s tax system is an important determinant of its economic performance. A well-structured, progressive tax system is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies.
But unfortunately, India does not have a better tax system and proposed reforms will not lead to a rise in a tax-GDP ratio which is a major problem now. Countries around the world usually implement one of three types of tax systems: residential taxation, citizenship-based taxation, or territorial taxation. The general rule of thumb with the residential system is 183 days; in other words, if you spend more than the allotted 183 days in a Country, your worldwide income will be taxed. In other cases, just being a resident in a certain country is enough to become subject to the country’s tax on your worldwide income. Fortunately, there are countries that administer a territorial tax system — one in which countries only tax the income that was earned in their geographical limits (i.e., income earned in Singapore is only subject to tax in Singapore).
Tax systems around the world fall into three main categories: regressive, proportional, and progressive, and two of the three impact high- and low-income earners differently. Regressive taxes have a greater impact on lower-income individuals than the wealthy. A regressive tax levies the same percentage on products or goods purchased regardless of the buyer’s income and are thought to be disproportionately difficult on low earners. Regressive taxes include property taxes, sales taxes/vat on goods, and excise taxes on consumables.
A proportional tax applies the same tax rate to all individuals regardless of income. A proportional tax also referred to as a flat tax, affects low, middle, and high-income earners relatively equally. They all pay the same tax rate, regardless of income. It’s meant to create equality between marginal tax rates and average tax rates paid. Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes/professional taxes.
A progressive tax is based on the taxpayer’s ability to pay. It imposes a lower tax rate on low-income earners than on those with a higher income. A progressive tax is a tax in which the tax rate increases as the taxable amount increases. This is usually achieved by creating tax brackets that group taxpayers by income ranges.
The term “progressive” refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate. The estate tax is another example of a progressive tax. A progressive tax has more of a financial impact on higher-income individuals than on low-income earners. Tax rate, along with tax liability, increases as an individual’s wealth increases. The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners.
Sin taxes,” a subset of excise taxes, are imposed on certain commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol. They’re levied in an effort to deter individuals from purchasing these products.
Tax is categorized as direct and indirect tax. The direct tax is a tax levied directly on a taxpayer who pays it to the Government and cannot pass it on to someone else. Impact and incidence of tax fall upon the same entity. The indirect tax is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another. Impact and incidence of tax does fall upon the same entity. Income tax, corporate tax, wealth tax, inheritance tax, estate are direct taxes while, customs duty, central excise duty, service tax, sales tax, value-added tax (VAT) are indirect taxes.
While low-tax countries are often called “tax havens,” and countries with the highest tax rates, are called “tax hazards” A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens also share limited or no financial information.
While the ratio tax-GDP determines the extent to which the government is able to finance its expenditure from tax collections, it is also an indicator of tax compliance. A higher tax-to-GDP ratio indicates the tax base is increasing along with growth in the GDP. A lower ratio, however, restricts the government’s capital spending, given that puts pressure on the fiscal deficit. India has one of the lowest tax GDP ratios in the world with around 10.9 per cent.
Developed countries and Nordic countries have a higher contribution of tax to their GDP and higher maximum tax rate too. India is way behind OECD members in terms of the tax-GDP ratio — an average of 34 per cent. Nordic countries like, Norway, Denmark, Iceland, Ireland have higher tax-GDP ratio. India ranks 144 in the World Happiness Report
This is abysmal when compared with countries ranked as top 20 in Global Happiness Index (GHI) 2020 starting from Finland (54.8 percent,)to Denmark (50.8 per cent), Switzerland (27.8 per cent). Iceland (40.4 percent), Norway (54.8 per cent), Netherlands (39.8 per cent), Sweden (49.8 per cent), New Zealand,(34.5 per cent), Austria (42.7 ), Luxembourg (36.5 per cent), Canada (31.7 per cent), Australia (28.5 per cent), United Kingdom (34.9 per cent), Israel (36.38) Costa Rica (21.8)) Ireland (30.8), Germany (44.5), United States (24.3 per cent), Czech Republic (20 per cent). Belgium (47.9 per cent).
Other advanced countries such as France (47.9), Italy (43.5 per cent), Spain (37.3 per cent), Japan (35.39 per cent), and BRICS nations such Brazil (34.4 per cent), Russia (19.5 per cent), China (20.1 per cent), SA (26.9 per cent), small countries like Cuba (44.8 per cent), Sri Lanka (11.6 per cent), SA (26.9 per cent), Pakistan (11 per cent) are ahead of India. BRICS is the group composed by the five major emerging countries – Brazil, Russia, India, China and South Africa – which together represent about 42 per cent) of the population, 23 per cent of GDP, 30 per cent of the territory and 18 per cent of the global trade. (https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio)
Since the government depends upon public funds for carrying out different social welfare schemes, the tax rates, especially personal tax rates are comparatively higher than in other European and OECD economies. The average tax rate in the world is 31.37 per cent, the European average is 32 per cent and the OECD average is 41.58 per cent.
Similarly, countries ranked as top 20 in global happiness Index having higher maximum tax rate: starting from Finland with number one position (56.85 per cent ) to Denmark (55.85 per cent), Switzerland (48.7 per cent), Iceland (52 per cent), Norway (37.2 per cent), Netherlands (49.5 per cent), Sweden (57 per cent), New Zealand (33 per cent), Austria (55 per cent), Luxembourg (45.78 per cent), Canada (44.5 per cent), Australia (45 per cent), and United Kingdom (47 per cent), Israel (50 per cent), Costa Rica (25 per cent), Ireland ( 52 per cent), Germany (47.45 per cent), United States (per cent), Czech Republic (45.7 per cent), Belgium (50 per cent).
Other advanced countries such as Japan (55.94 per cent), Italy (47 per cent), Spain (52 per cent), France (45 per cent) and other BRICS nations such as Brazil (27.5 per cent), Russia (47 per cent), China (45 per cent), SA (26.9 per cent) and small countries like Cuba (50 per cent) Slovenia (50 per cent), Nepal (36 per cent) have much higher maximum tax rate compared to India having 30 per cent only (https://en.wikipedia.org/wiki/List_of_countries_by_tax_rates)
What is disconcerting is that the ratio of central taxes -to-GDP slid further in 2019-20 to a 10-year low of 9.88 per cent, driven by a decline in collections from customs duties and corporation tax, while excise duty posted marginal growth. This was despite the fact that only a week was under lockdown in the year. The ratio stood at 10.97 per cent in 2018-19, and at 11.22 per cent in 2017-18. It is only estimated to decline further, with revenues falling on account of a slump in economic activity. In 2019-20, revenues receipts realized fell short of Rs 2.98 lakh crore from amount envisaged in budget placed in February 2019
The factor dominantly responsible for this decline was the decision, in the midst of a demand recession, to seek to appease the corporate behemoths under the camouflage of stimulating the economy with corporate tax concessions announced in September 2019. This is a huge bonanza, which dominantly explains the contraction of tax revenues. India suffers a shortage of resources because it not only fails to curb tax evasion but does not try to tax the rich more when compared to other countries. India does not have an inheritance tax. But there are countries having an inheritance tax. Japan has the world’s highest rate of 55 per cent followed by South Korea (50 per cent) and France (45 per cent), US (40 per cent), UK (40 per cent), Spain (34 per cent), Ireland (33 per cent), Belgium (30 per cent), Germany (30 per cent), The U.S. has the fourth-highest estate or inheritance tax rate in the OECD.
While India does not have a wealth tax, there are also certain countries that have a wealth tax. However this varies from country to country; the highest would be that of Luxembourg where it accounted for 7.18 per cent of total tax revenue in 2018, the lowest would be Germany where it accounted for 0.03 per cent of total tax revenue in 2018. However, the wealth tax rate is highest in Switzerland (9.396 per cent), followed by Spain (2.618 per cent), Norway (2.470 per cent), Norway (2.470 per cent), France (2.166 per cent), Luxembourg (1.995), Belgium (1.123 per cent ), Germany (0.471 per cent ), Canada (0.335 per cent ), Hungary (0.154 per cent ).
As on November 30, 2019, there are around 5 lakh cases pending at various levels with disputed tax arrears amounting to approximately Rs 9 lakh crore locked in direct tax disputes. Further, given the lower rate of disposal of appeals, the amount of disputed tax arrears locked-up in these appeals is on the rise. A huge amount of resources lost through the tax foregone. Failing to tax rich, curbing tax evasion, the Indian government is imposing increasingly excise tax on petroleum products which is regressive and spawning inflation
The government is resorting to controversial aggressive disinvestment/ privatization of the public sector or extorting higher dividends from RBI or the public sector to help bridge the fiscal deficit gap. On February 1 budget presented, the divestment target for 2020-21 is said to be Rs 2.1 lakh crore against the same of Rs 1.05 lakh crore in previous fiscal. In 2019-20, the government had hiked the budgeted receipts from privatization to Rs. 1,05,000 crore. But as the economy slowed it managed to mobilize only a little more than Rs. 50,000 crore.
But over the past few decades, due to the introduction of neoliberalism that transferred power from state/ government to corporate/rich/market has led to more tax concession to rich/corporate and a decline in a reduction in the maximum tax rate. Many countries had recognized this and have reformed their tax system to raise resources. But India continues to be dogged by Laffer curve theory and no attempt is made to tax rich. This is resulting in a shortage of resources leading to a reduction in developmental expenditure. The Government should try to have a tax system that will generate more resources by taxing rich.
*The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]
DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.