A smarter way to tax

The numbers are bleak, but only an overhaul of tax administration can truly serve the government's ends

On Monday, the news from the tax front was wretched. The revenue secretary warned that the government intended to go after moneyed people who dodge their tax liability. With gross direct tax revenues rising by just over 7 per cent till November, he has reason to worry. The numbers show a shortfall that may be difficult to cover, given that the supporting data is also dismal. For instance, corporate tax rose by a mere 3 per cent in eight months and data on freight carted by the Indian Railways for the same period shows a growth rate of just 4.7 per cent. These are bleak numbers, and they make it necessary for the government to try and extract every possible legitimate paisa of tax revenue. On the same day, industry chamber FICCI sent its pre-budget tax memorandum, which asks, among other things, that inheritance tax be avoided, as well as tax on dividends from overseas operations. But it offers little advice on how to orient the tax set-up to the requirements of a highly diversified economy.

Both developments point to the same flaw, the lack of a modern and efficient tax administrative structure. As the revenue secretary pointed out, only a third of those who deposited more than Rs 10 lakh in their bank accounts claimed an income level of the same amount. This scale of mismatch happens year after year, as tax officials chase the here and now, with scant specialisation or time to develop an understanding of new technology and the requirements of a modern, non-invasive but efficient tax system. As a result, they also fail to develop the ability to dissect suggestions from sections of taxpayers who exploit this deficiency and ask for short-term incentives and set-offs. Both the Shome and Kelkar reports, commissioned by the ministry and the PMO earlier this year, have pointed to this, more than anything, as the key to improve the tax-GDP ratio in the economy.

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