Jail threats won't solve taxman's problems

India's income tax authorities never seem to learn. To begin with, there was widespread disappointment when the expectation raised during the Lok Sabha election campaign that a new government would do away with retrospective changes in tax norms was belied. Not only were notices issued on foreign portfolio investors retrospectively for recovery of minimum alternate tax, the move was shelved after tough initial posturing in its defence. Then came the issue of a vastly more complicated new tax return form being issued, which included provisions for submitting information on things like foreign travel. Again, after a public outcry, the new form was withdrawn and modified to an extent. Now comes a fresh absurdity: tax officials have been asked to put the fear of being jailed into the hearts of potential tax evaders in order to make them fall in line.

The fact is that punishments for various income tax offences are well codified and those who carefully dodge paying taxes and their tax advisors are well aware of them. To highlight a recourse already available to tax officers is to unnecessarily spread panic arising from fears of reckless use and indirectly admitting that tax officers were not adequately using all the weapons that were already there in their armoury. This can hardly bring about an atmosphere in which people invest more - the government is actively working to revive the investment climate - in anticipation of a stable and fair regulatory regime. The latest missive from the head of the tax administration to its foot soldiers could not be more different from another issued earlier in the year asking officials to desist from issuing high-value tax demands simply to be able to tot up an impressive total at the end of the year that they could expect to be a determinant of their good performance. The directive makes clear that what you claim does not matter; what does, is how much of what is claimed stands scrutiny during appeal. Demands have to be carefully worked out in the context of extant law and practice for them to successfully negotiate judicial appeals. The earlier missive also pointed out that search and seizure, as a tool of recovery, is not very effective. Common sense should indicate that tax raids gain high media visibility and little else as, again, clever tax evaders are hardly likely to leave around incriminating material in their known office premises and homes.

It needs emphasising that one tool for tax recovery, which has high long-term potential, can be used far more. It is the survey of luxury cars, palatial residences and posh offices to find out who their beneficial owners are and whether they have been paying taxes on incomes used to acquire those assets. The scope for cross-tabulation and unearthing of patterns offered by information technology tools like analytics and data mining should be used extensively. Overall, there is no substitute for hard work methodically undertaken over time. Gimmicks only distract and are counterproductive. It is time for the prime minister and finance minister to take serious steps to reform the nature of tax administration in India, or troubles of this sort will continue to recur - torpedoing promises made by the political leadership.