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A Deccan Vision's empathetic appeal

SAVE INDIA'S ABUSED TAXPAYERS

An unheard conscious cry reverberating for admittance

Millions of the country’s hapless middle-class taxpayers were hoping that the Finance Minister Mrs. Nirmala Sethuraman during her 2024-25 Budget presentations would provide some significant tax sops to them to cope with prevailing spirals of high commodities prices. But alas! They were heartbroken and left grossly frustrated.   

The Indian tax system has long been a subject of intense debate and scrutiny. With an extremely complex web of direct and indirect taxes, Indian taxpayers often feel overwhelmed and burdened. Despite contributing significantly to the nation's exchequer, many taxpayers face numerous challenges, ranging from high tax rates to harassment by tax authorities. Addressing these issues is crucial for ensuring a country's desired economic growth, fairness, and the well-being of its citizens.

Current State of Indian Taxation

India's tax structure comprises direct taxes, like income and corporate taxes, and indirect taxes such as GST. Direct taxes are levied on the income and profits of individuals and corporations, while indirect taxes are imposed on goods and services consumed. The tax rates vary across different income groups, with higher rates for higher income brackets.

In recent years, the government claims to have made sincere efforts in simplifying the tax system and boosting compliance. The introduction of Goods and Services Tax (GST) in 2017 was a significant step towards creating a unified tax structure. However, the implementation of GST has faced criticism for its complexity and frequent changes in its structural constructs, which added more confusion than resolve among taxpayers.

Despite initiating several complementary efforts, the compliance rate remained low. According to the Central Board of Direct Taxes (CBDT), only a small percentage of the population files income tax returns regularly. This low compliance rate puts additional pressure on honest taxpayers, who were compelled to bear a disproportionate share of the overall tax burdens.

The Paradoxical Embrace

India’s taxing system is so unjustified it defies every logic. Say for example, when the salaried class earns Rs. 7 crore, pays Rs. 3 crores on tax, and when the business revenue is Rs. 40 crores, income tax ranges between Rs. 50-80 lakh, but while the political party revenue is about Rs. 7,000 crores, income tax is zero and so is the IPL revenue amounts to the tune of Rs. 12,000 crore, pays zero income tax.

Challenges Faced by Taxpayers

Amongst the many, the most important ones are:

1) Complexity and Lack of Transparency

One of the most significant challenges faced by Indian taxpayers these days is the draconian complexity of the tax laws. The Income Tax Act, of 1961, which governs direct taxes, is notorious for its convoluted provisions and frequent amendments. Taxpayers often find it challenging to keep up with the changes, leading to unintentional non-compliance. 

Moreover, the lack of transparency in tax rules and regulations adds to the confusion. Ambiguous provisions and conflicting interpretations make it difficult for taxpayers to understand their obligations and rights. This lack of clarity often results in disputes between taxpayers and tax admin authorities, further complicating the tax compliance process.

2) High Tax Rates and Burden

India's tax rates are among the highest in the world. For instance, for individuals, the highest income tax rate is 30%, excluding additional surcharges and cess, and for corporations, the effective tax rate can go up to 25%, depending on their annual turnover.

These high tax rates place a significant burden on taxpayers, particularly the middle class and small businesses. High tax rates reduce disposable income considerably,  discourage savings and investment, and stifle economic growth. Many taxpayers feel that they do not receive adequate public services in return for the high taxes they pay, leading to dissatisfaction and a sense of unfairness.

3) Harassment and Corruption

Harassment and corruption by tax authorities are major concerns for Indian taxpayers. Instances of tax officials misusing their official powers and supremacy to harass taxpayers are not uncommon. This harassment often takes the form of unwarranted scrutiny, excessive demands for documentation, and arbitrary assessments.

Corruption further exacerbates the problem. Some tax officials demand bribes to expedite processes or to overlook minor discrepancies. This not only undermines the integrity of the tax system but also places an additional financial burden on taxpayers.

4) Inefficient Tax Administration

The inefficiency of the tax administration is another significant issue. The tax filing and assessment processes are often slow and cumbersome, causing delays and frustration for taxpayers. Despite recent efforts to digitize tax administration, many processes still remain manual and time-consuming.

The lack of necessary technological upgradation in tax administration is evident in the numerous technical glitches and issues faced by taxpayers while filing returns or seeking refunds. These inefficiencies not only increase one’s compliance costs but also deter taxpayers from fulfilling their obligations promptly.

The Impact on the Economy

The impacts can broadly be categorized as under:

1)Discouragement of Investment

High taxes and a complex tax system discourage both domestic and foreign investment. Investors seek environments with stable and predictable tax regimes. The frequent changes and ambiguities in India's tax laws often create uncertainty, making bemused investors hesitant to commit funds to the country.

This reluctance to invest hampers economic growth and possible scope for job creation. Small businesses, which are crucial for mass employment generation, are particularly affected. High taxes and compliance costs eat away at their profits, reducing their capacity to expand and hire more employees.

2) Economic Inequality

India's tax system contributes to economic inequality. While the wealthy can often find ways to minimize their tax liability through legal loopholes and sophisticated tax planning, the middle class, and the small and medium businesses bear the brunt of the tax burden. This widening gap between the rich and the poor is detrimental to social cohesion, integrity, and economic stability.

3) Informal Economy

The complexities and high costs associated with formal compliance drive many businesses into the informal sector. The informal economy, which operates outside the regulatory framework, mostly evades taxes, depriving the government of much-needed revenue. This, in turn, puts more pressure on the formal sector and honest taxpayers to make up for the shortfall.

Reforms and Solutions desired

1) Simplification of Tax Laws

Simplifying tax laws is essential to reduce the compliance burden on taxpayers. Clear, concise, and stable tax provisions will make it easier for taxpayers to understand their obligations and comply with them. The government should engage with stakeholders, including taxpayers, tax professionals, and industry bodies, to identify areas of complexity and ambiguity and work towards simplification.

2) Reducing Tax Rates

Lowering tax rates can incentivize compliance and boost economic growth. A moderate tax rate, coupled with a broader tax base, can generate sufficient revenue without overburdening taxpayers. Lower tax rates will also make India a more attractive destination for investment, fostering job creation and economic development.

3) Improving Tax Administration

The tax administration needs significant improvements to enhance efficiency and transparency. The adoption of AI technology and automation can streamline processes, reduce delays, and minimize human intervention, thereby curbing corruption. Training programs for tax officials can enhance their skills and promote ethical conduct.

The government should also establish clear guidelines and accountability mechanisms for tax officials to prevent harassment and misuse of power. An independent ombudsman can address grievances and ensure fair treatment of taxpayers.

4) Transparency and Anti-Corruption Measures

Transparency is key to building trust between taxpayers and the tax administration. The government should ensure that tax rules and regulations are clear, accessible, and consistently applied without any bias. Regular audits and performance reviews of tax officials can deter corrupt practices.

Citizens’ positive engagement and watchdog organizations play a crucial role in promoting transparency and accountability. Platforms for taxpayers to report grievances and share their experiences can be of added help in identifying systemic issues and driving reforms.

Conclusion

India's taxpayers are the backbone of the nation's economy, contributing significantly to revenue generation. However, the challenges they face like high tax rates, complex laws, harassment, and inefficiency negate undermining their trust in the tax system. Addressing these issues through the process of simplification, rate reduction, administrative reforms, and transparency measures is crucial for creating a fair and efficient tax system.

A reformed tax system will not alone alleviate the burden on honest taxpayers but also foster economic growth, investment, and social equity. Policymakers, tax authorities, and citizens must work together towards this goal, ensuring that India's tax system supports the nation's development and the well-being of its people.

[The views expressed by the author are personal]

    By Prof. (Dr.) Pranab Kumar Bhattacharya

 (The writer is an Emeritus Professor of Management and an independent Political analyst)