One-sided policymaking

Tax concerns should not always trump citizens' convenience

It is natural that the government wishes to fine-tune its ability to manage, track, and minimise the use of unaccounted money in the economy. Mature economies ensure that their tax systems envelop most productive activity, and that tax evasion or avoidance is rendered difficult. But this needs to be done transparently and effectively, without excessive inconvenience being rendered to ordinary taxpayers. The current Indian administration has at various points in the past insisted that it intends to protect taxpayers from excessive intervention. And some major steps in this direction, such as the “faceless” interface with the tax authorities, have been taken. But two recent efforts show how easy it is to slip back into old, bad ways.

The concern about the Reserve Bank of India’s (RBI’s) notification regarding Rs 2,000 notes is the first such example. The RBI last week announced this high-denomination note would be withdrawn from circulation, although it would continue to be legal tender. While this was clearly meant to be different from the ill-fated demonetisation exercise of 2016, it nevertheless sparked traumatic memories of that decision and the chaos that followed. Many have since wondered how to exchange whatever notes they may possess, and there is much anecdotal evidence that shops and other establishments are refusing to accept these notes. RBI Governor Shaktikanta Das had to step in on Monday to try and assuage these fears. While the central bank has insisted that the note had simply served its purpose and had reached the end of its expected lifespan, this could have been achieved without any high-profile notification or a stated “end date” of September 30. Thus, there is little doubt that minimising cash holdings and high-value cash transactions was also part of the reasoning behind this move. Yet this has, as in 2016, failed to take into account the effect on the regular Indian citizen.

Similar lack of thought seems visible in recent changes to the Liberalised Remittance Scheme, or LRS, under which Indians can send up to $250,000 a year abroad for investment or other specific purposes. The government has now decided to raise the level of tax collected at source for payments done using international credit cards. After an outcry that this would be an enormous inconvenience, the government has softened its stance somewhat by saying that payments totalling below Rs 7 lakh in a year would not be subject to the 20 per cent withholding. It is far from certain how this threshold will be implemented, since real-time data on all spending by any one individual is hardly available to all his or her card issuers. Although any such withheld tax is supposed to be adjustable against the individual’s year-end tax bill, it greatly raises the paperwork and compliance burden. The complexity of business expenses also being subject to tax collected at source is an unnecessary drag, especially on owners or employees of smaller enterprises. Clearly, the aim is simply to maximise collection and surveillance without making the effort of setting up better real-time systems that would cut down on actual evasion or round-tripping. In order to avoid the humiliation of constantly having to water down or clarify the government’s moves, its agencies should examine the effect on citizens of their decisions in advance. Proper tax administration requires a more empathetic view of taxpayers’ concerns.