'cause I'm the taxman

India has seen the sharpest increase in the Forbes Tax Misery Index - up 24 points, compared to China's seven

For those who continue to be harassed by the taxman, the sharp drop in India’s ranking in Forbes magazine’s Tax Misery & Reforms Index comes as an affirmation of how things have not got better, and indeed may have got worse, despite more than 15 years of tax reform. Though India has seen the sharpest increase in the Forbes Tax Misery Index (its Misery score rose 24 points, compared to China’s seven), the reason for this is unexpected — almost the entire increase can be explained by the increased social security contributions that the government now expects new bureaucrats to make (under the “New Pension Scheme”, new recruits to the bureaucracy have to make individual provident fund contributions, which they did not have to do in the past). But few rational observers will regard this as a regressive measure (as it translates into the adoption of a sustainable “defined contribution” model, as opposed to a “defined benefit” model). In other words, the Forbes index is not a particularly useful indicator this year.

 

The question is whether dealing with the tax authorities has got better or worse. By definition, the introduction of electronic filing, the lowering of tax rates, the reduction in the number of rates, and the automaticity associated with digital functioning (all introduced in the last 15 years) should have made a big difference. Unfortunately, the scope of taxes has increased under the current government, with the introduction of the cash withdrawal tax (which has finally been withdrawn) and the notorious fringe benefit tax. Other negatives are the large backlog in tax litigation, the government’s power to change tax laws retrospectively (sometimes going back a few decades, in order to undo a court judgment) and the uncertainty concerning the applicability of relatively new taxes like the service tax. There is also no shortage of stories doing the rounds about tax officials demanding bribes for handing over refund cheques, about the law of limitations being circumvented by raising pointless queries in order to keep a tax return open to further scrutiny, and of companies being asked to deposit additional tax even as the assessing officer refuses to issue a tax demand notice (presumably the officer is trying to meet some internal target that has been set).

Meanwhile, a recent survey by the Federation of Indian Chambers of Commerce and Industry (Ficci) and PricewaterhouseCoopers tries to assess companies’ Total Tax Contribution, and has come up with interesting results. The firms surveyed contributed nearly a tenth of the government’s total tax collections, and were asked about a total of 23 taxes, 11 at the Central level and 12 at the state/local level that they paid/collected. One finding was that, for every rupee of taxes that the participating companies had to pay the government, they collected around Rs 1.80 as taxes. That is, they collected a significant part of the government’s taxes for it. This meant an onerous set of compliance costs as well as important liabilities if the firm failed to collect these taxes from various suppliers/customers/employees. Equally important, the study quantified the total tax liability on a company. This worked out to around 53 per cent of ‘profits before all business taxes borne’. Since several taxes were deductible for calculating the traditional profit before tax, these were added back. Of the Total Tax Rate of 53 per cent, a little over half, or 28 percentage points, represented corporate tax while the remaining 25 percentage points comprised excise, import duties, and so on. Add to this the cost of compliance in paying 23 taxes, and the costs become quite onerous.