China can learn from India’s whistleblowing rewards
The Ministry of Finance of India introduced an updated tax informant reward scheme in April, adjusting the reward ceiling from the equivalent of $22,000 to about $147,000 for hiding income and $734,000 for black money. Cui Yongyuan, a former Chinese talk show host, has blown the whistle for tax evasion in the entertainment industry, which rapidly developed into an internet sensation. The discussion of whistleblowers has taken center stage.
The disclosure incentive in China is limited, since the reward maxes out at 100,000 yuan ($15,400) and reports must be made with a real name. Learning from India, China can bring up its reward limit a bit. But due to the moral risk, relying on whistleblowers can only be a secondary option. In order to make the tax system effective at reducing the income gap, tax reform and adopting more technology would be more reliable options.
The Indian reward scheme is another attempt after last year’s botched demonetization move to try to tackle money laundering. The scheme specifically offered information for foreigners who want to provide information about tax evasion. The choice of a higher reward is due to the unbalanced infrastructure and technology level within India. China, which has better technology coverage, does not have to rely on citizens to provide tips.
Though the reward amount can be increased, related laws and regulations need improvement. On the one hand, better protection of the whistleblower’s information and personal safety is needed. On the other hand, the handling and collecting of information cannot violate the law and the rights of other citizens.
For instance, photographs cannot be obtained by invading privacy. It is necessary to draw a clear line between whistleblowing and encouraging the harvesting of personal information, which may jeopardize public security.
Whistleblowing should only act as a supplement to social norms to generate positive social effects. Whistleblowing should be bound with the social credit system. If incorrect information is intentionally provided, the whistleblower will blemish his or her social credit, in addition to facing criminal charges.
Moreover, the taxation department needs to take a more active role, rather than letting whistleblowing become a main method to gain information.
Those who are able should do more work. High income is generally proportionate with social responsibilities and contributions. It is the outcome of market competition.
High income individuals, who can afford accountants and lawyers, have more clever tax avoidance and tax evasion options. To change this situation, a major breakthrough is required in tax reform and tax collection.
China has adopted a classified income tax system. One downside is the lack of comprehensive evaluation of the taxpayer’s real income. The income tax reform has already been drafted. A comprehensive calculation combining salary, labor, remuneration income and royalties is expected to be introduced soon.
Solving the problem of information asymmetry is vital during the process of tax collection. Many people, especially those in the high income group, have their income sources coming from different provinces or even countries. This poses a great challenge for the taxation administration. China’s taxation department will have to create an information exchange mechanism and share information with as many countries as possible.
Also, more technology such as big data, the internet, and cloud computing could be applied to broaden the information collection channels. For example, big data would allow comparison of various types of data on the same platform.
These changes will be a process, as will raising consciousness about paying taxes. China is moving along the right track. As the tax reform takes place, and new technologies are adopted, whistleblowing will hopefully become the last resort.