Widening of direct tax base
Notwithstanding demonetisation and GST, the jury is still out on the government’s ability to achieve this goal
Implementation of the goods and services tax (GST) from July 1, 2017, is a huge step forward in uniform nation-wide collection of indirect taxes. Prime Minister (PM) Narendra Modi mentioned in his speech in Parliament on July 1 that GST would promote a “corruption free (indirect) taxation system”. Any number of experts have commented on the enhanced transparency of GST nudging India towards one market despite the implementation difficulties and disadvantages of multiple GST rates.
Comparatively little has been said about evasion of direct taxes based on the familiar yet startling information included in PM Modi’s speech at the Chartered Accountants’ Day again on July 1, 2017. This is perhaps because the facts sit uncomfortably with our wealthy kleptocrats and revenue-administrative service officials. For instance, the PM said that India has: (a) 800,000 doctors; (b) more than 20 million engineers; (c) about 800,000 accountants; and (d) 21.8 million Indians went on holidays to foreign destinations last year. However, just 3.2 million taxpayers declared an annual income above ~10 lakh. This 3.2 million taxpayer number is ridiculously low, particularly as the PM has highlighted many of those included are salaried employees in government or the private sector.
On July 12, a few members of the Parliamentary Standing Committee on Finance were critical of the Reserve Bank of India (RBI) for not yet having counted the cash which was deposited post demonetisation. The suspicion is that RBI is not providing this information since all the currency which was held by the public has come back to it through banks. The sceptical conclusion is that demonetisation was a failure in unearthing unaccounted cash.
In his Budget speech on February 1, 2017, Finance Minister (FM) Arun Jaitley stated that post demonetisation cash deposits, ranging from ~2 lakh to ~80 lakh, were made in 11 million bank accounts. In another 148,000 accounts, the deposits were above ~80 lakh each and the average deposit size was ~3.3 crore. These figures again underscore that this number of just 3.2 million taxpayers with annual income above ~10 lakh is absurdly small.
In the context of demonetisation, the PM said at the Chartered Accountants’ Day event that the “government has placed a massive system for data mining, for the money stocked with banks, whereby the details of the transactions of money before and after November 8 (2016) have been extensively studied”. And, “whatever data mining has been done till now has revealed that the transactions of more than 300,000 companies are under the radar of suspicion”. The PM asked “don’t you (chartered accountants i.e. CAs) feel the need to identify such people, who are sitting among you, who supported these companies (in laundering black money via shell companies)?” PM Modi mentioned that “over 1,400 cases (against CAs) are pending for several years (and asked) isn’t this a source of worry for such highly qualified professionals?” As government identifies income-tax evaders and complicit CAs it should be extremely watchful to prevent revenue officials from going on fishing expeditions to harass and extort.
The pointed reminder from the PM to CAs to desist from helping those trying to whitewash their black money is useful. However, it is unlikely that this exhortation would be sufficient. Even some large well-known Indian companies deliberately fudge their income statement numbers to minimise tax dues and this cannot happen without the collusion of accountants. On a provocative note, if an industry body such as the Institute of Chartered Accountants of India can function as an effective regulator of CAs, why should the Association of Mutual Funds of India not regulate mutual funds rather than the Securities and Exchange Board of India? It is high time that a statute-based regulator is set up for CAs.
In recent months there are anecdotal reports that significant proportions of real estate purchases are again being transacted in cash in high-value notes. To an extent, this has become easier because the highest value note has doubled from ~1,000 to ~2,000. Studies in Europe and the US have shown that high-denomination notes do not enhance economic activity and are often used to evade taxes. If government is serious about clamping down on tax evasion, it needs to work with RBI to gradually but consistently eliminate highvalue notes over the next couple of years. This sounds drastic but the poor do not hoard large volumes of high-denomination notes. A pre-requirement is unfailing internet connectivity even in the remotest rural areas to enable cash-less transactions.
On a less hopeful note, the FM introduced the concept of anonymous electoral bonds in his Budget speech on February 1. Such bonds would be issued by banks after donors to political parties deposit the corresponding amounts in banks. These bonds would then be credited to accounts of political parties which are registered with the Election Commission of India (ECI) and there would be no cap on such donations as was the case earlier. The government’s stand is that these electoral bonds will ensure that only legitimate and post-tax paid funds would be donated to political parties. However, Section 182(3) of the Companies Act has been diluted to exempt companies from having to name the specific political parties to whom donations have been made.
On June 1, 2017, it was reported that the ECI has formally written to the law ministry asking the government to “reconsider” and modify the recent amendments, relating to electoral bonds, of the Representation of the People Act and the Companies Act. The ECI has suggested a reversion to the statusquo ante. In a written response to the Parliamentary Standing Committee on Personnel, Public Grievances and Law & Justice, the ECI has correctly stated that electoral bonds amount to a “retrograde” step since introduction of such bonds “compromises transparency”.
To sum up, the jury is still out on the ability of the government to widen the base for direct taxes. The government needs to use the information it has collated post demonetisation fairly and systematically plus reverse the steps which allow anonymous electoral bonds.