Prime Minister Narendra Modi’s announcement of the adoption of the taxpayer charter by the Income-Tax Department
is a big step forward and should help build trust in the tax administration. With the adoption of the charter, India joined a select group of countries such as the US and Canada that have such provisions in the law. Through the charter, the department is now committed to treating taxpayers as honest; providing complete and accurate information; giving a fair and just system; and, among other things, reducing compliance cost. It would, however, be important for the department to ensure that these commitments don’t remain only on paper. For example, the adoption of faceless assessment and scrutiny is aimed at reducing the harassment of taxpayers because cases will be allotted randomly to officials in different parts of the country. It’s a good move, but a large number of tax officials are reported to have already started pushing back against the new faceless programme because they see problems in the lack of consultation and inadequate resources. They also fear that reduced tax collection would increase pressure on officers to meet tax targets somehow. To be fair, the government has been working over the years to reduce the trust deficit between taxpayers and the department, but allegations of harassment by the latter refuse to go.
However, this is only one aspect of the overall tax administration that needs reforms. A key reason why taxpayers are often at the receiving end is because the government tends to set over-ambitious revenue targets, prompting tax officers to adopt harsh measures to meet them. And this practice is not limited to personal income tax. This is not to suggest that the government should not aim to expand the tax base. As Mr Modi rightly noted in his address on Thursday, only 15 million pay income tax. This base is just too low to provide adequate resources to the government to fulfil its obligations.
But this is partly because of the tax policy. The government in 2019 doubled the exemption limit for income tax to Rs 5 lakh. This allowed the majority of taxpayers to move out of the tax net. The exemption is fairly liberal compared to the per capita income and the poverty line. On the other hand, the government increased the marginal rate of income tax for the high-income group significantly, which could result in evasion. The tax administration should aim to strike a balance and collect a small amount of tax from a wider base of taxpayers. Further, there are a large number of people evading the system and not paying their fair share. The department should use more technology and Big Data to bring more people into the tax net. The late Arun Jaitley in his 2018 Budget speech, for instance, highlighted that salaried taxpayers, on average, paid about three times the income tax that self-employed ones did. Thus, the tax administration, aside from bringing more people into the net, should also focus on improving compliance. The government should also work on training tax officers because the focus needs to shift from merely raising tax orders to supporting taxpayers and truly streamlining assessments. This will not only boost tax collection and allow the government to spend more freely but will also help reduce the burden on honest taxpayers.