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What Changes Are Needed In Tax Administration To Make It More Efficient?

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Keeping the state of public finances and the accountability at the centre, the Centre for the Study of Finance and Economics (CSFE), Impact and Policy Research Institute (IMPRI) organised a #WebPolicyTalk, The State of Public Finances – #TowardsAccountability on Are We in Good Hands? Is Tax Administration in India Following Good International Practices? on 22 April, 2021.

Our esteemed speaker for the session was Dr Munawer Khwaja, Fiscal Economist, Former Technical Advisor, Fiscal Affairs Department, International Monetary Fund (IMF), United States.

The panellists were Prof Indira Iyer, Professor, National Council of Applied Economics Research (NCAER), New Delhi, Former IRS and Ex-Director, Tax Policy Research Unit, Ministry of Finance and Mr Ashok Sinha IRS, Retired Vice Chairman, Tax Settlement Commission, Department of Revenue, Ministry of Finance.

Setting the tone for the discussion, the chair of the session, Prof Atul Sarma, Visiting Professor, Institute for Studies in Industrial Development (ISID), New Delhi; Former Member, Thirteenth Finance Commission, spoke about the importance of tax design and administration, which is critically important for the efficient tax system.

The Indian tax system has become inefficient in terms of unrealised tax revenue and a lower number of income taxpayers. Indian tax design is neither simple nor transparent.

The government attempted to address such distortions in 2007 by initiating the Direct Tax Code to simplify the direct taxes and remove various distortions. This code was placed before the parliament’s standing committee and was to come into effect from 1 April, 2012.

However, due to certain delays, it did not come into effect. The fallacies in the design of Goods and Services Tax (GST) were also brought in light that brings the distortions and ineffectiveness.

Quality of Tax System Matters for the Economy

Representative Image. (by Prasanta Sahoo from Pixabay)

Dr Khwaja began the discussion by pointing out that the quality of the tax system has a direct impact on the productivity of firms and, therefore, on economic performance.

Using the World Bank data for enterprise surveys from about 70 countries and panel data analysis, the study shows that better tax administration attenuates the productivity gap of small and young firms relative to large and older firms, which effectively controls other aspects of tax policy and economic governance.

India’s Economic Growth During COVID-19 Pandemic

In the World Economic Outlook report of April 2020, it was projected that India would experience a growth rate of 1.9% rather than 5%, as predicted before. However, it fell to -8%.

Some economists believe that the recovery might seem V-shaped, but in reality, it is K-shaped. The rich class recovered better than the rest as their income increased while the poor suffered income and job loss and consumption disruptions.

Tax-to-GDP Ratio

The Tax-to-GDP ratio of India has been improving over the years but is about half of OECD countries which can be attributed to the fact that rich nations levy more taxes. Tax policy and tax administration both need to be strengthened for India to achieve better collections and move towards better growth trajectories.

International Comparison: GST-VAT Gap

About 166 countries globally use VAT and GST as the mainstay of their public finance. However, there have been some flaws. One is the complex centre-state relation and another is design flow.

The GDP-GST gap talks about what potentially one can collect with respect to what is actually being collected. In India, the GST gap is about 6% of GDP, which translates into a 49% gap compared to the potential which could have been collected. Countries like Sweden and Russia has a tax gap of only 1%.

Tax Administration Issues

Representative Image. (Source: pxfuel)

In most of the countries in the world, tax administration is integrated. However, in India, taxes are fragmented between direct and indirect taxes. Due to this, there is a huge opportunity for companies to cheat between the two taxes, which provides opportunities for tax avoiders to arbitrage.

Secondly, the role of chairpersons is very strategic and should stay for a longer time, at least 3 to 5 years, so that long-term visions and decisions can be taken on the tax administration.

Thirdly, corruption, which comes in various forms: extortion, collusion, bribery, etc. According to the corruption perception index ranking, New Zealand is ranked highest, while India ranked 86th, and Somalia ranked the lowest at 179.

Faceless Assessment – A Good Beginning

This has a very good intention of moving towards good international practices. The taxpayers still belong to a tax office jurisdiction and need to report to a tax officer even with faceless assessment. The designs need to be further evolved.

Dispute Resolution

Finally, TADAT (Tax Administration Diagnostic Assessment Tool), a diagnostic tool, is used to measure e-tax administration performance and how close or far these are to international good practices in tax administration.

In the performance area on dispute resolution, the scores are given as A for 30 days, B for 60 days, C for 90 days and D for more than 90 days. After the departmental appeal, cases linger in tribunals and courts for years. This favours the taxpayer because even after paying any interest due, the NPV of the tax due decreases significantly.

Prof Iyer highlighted domestic and international issues in taxes. There have been incremental reforms, two direct tax committee reports (2018 and 2019) have been drawn by the government under the Ministry of Finance.

One of the pathbreaking reforms which make India’s tax structure more competitive is a reduction in corporate tax rates. As a result, our tax rates can compete with some South Asian countries in terms of investment and goals.

Tax concepts like sustainability, proportionality and neutrality also come into play. Among different OECD countries, there are different views, U.S. views which takes market intangibles approach, U.K. view with the user-based approach.

Mr Sinha pointed out that with better technology, people are slowly approaching phone numbers. The important thing is enforcement, despite several supervisory officers, the grievances are not settled or taken care of.

There is some light at the end of the tunnel. There are great developments like faceless assessments, which require more improvements and things like corruption need to be tackled and dispute resolution needs to be strengthened.

Acknowledgement: Swati Solanki is Research Interns at IMPRI and is pursuing a B.A(Hons.) Economics from Shri Ram College of Commerce, University of Delhi.

Arjun Kumar, Ritika Gupta, Anshula Mehta, Sunidhi Agarwal, Chhavi Kapoor

Featured Image via pxfuel
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