Search for tax evasion

India needs to expand its tax base

Government finances this year have benefitted from a higher than expected revenue collection. While the third wave of the pandemic and associated disruption in economic activity would have an impact, the broad trend in tax collection is widely expected to continue this year. As the latest numbers show, the Central government’s fiscal deficit at the end of November was at 46.2 per cent of the Budget estimates. The comparable number in 2019-20 was 114.8 per cent. However, better than expected revenue collection has not affected the enthusiasm of the income tax department to look for undisclosed income. It has conducted a record level of searches in the current fiscal year. As reported by this newspaper last week, so far, the department has found an undisclosed income of Rs 32,000 crore. While it is encouraging that the tax department is working hard to make sure that everyone pays his or her share, it is important to be mindful of unintended consequences like hardship and harassment faced by taxpayers.
 

The increased level of searches highlights the basic weakness in India’s fiscal management. Although tax collection has improved significantly this year, it remains to be seen if the buoyancy continues in the medium term and decisively pushes up the overall tax-to-gross domestic product (GDP) ratio. India’s low and stagnant tax-to-GDP ratio puts pressure on government finances and limits the capacity of both the Central and state governments to spend on developmental needs. The underperformance of goods and services tax has only worsened the situation and perhaps put more pressure on direct tax collection. This is also underscored by the manner in which the tax department has been empowered over the years. Besides recent legislation to unearth black money and benami transactions, the Finance Act, 2017, did away with the need for tax officials to declare to a court as to why in their opinion a search is necessary. Tax officials have now been given the powers to do so if they believe to have plausible information that income has escaped assessment over the last three years. This has predictably increased the level of searches and will affect taxpayers.

It is worth recognising that only a small fraction of what the tax department has found will ultimately reach the treasury. For instance, in 2018-19, it filed over 3,500 cases for prosecution and got convictions only in 105. It also has a large number of disputes running with taxpayers. The government introduced the Vivad se Vishwas scheme in 2020 to settle direct tax cases with the disputed tax amount of about Rs 9.7 trillion in over 500,000 cases. It is reported to have settled cases involving about Rs 1 trillion. However, most of these were disputes with relatively small amounts, and large taxpayers did not come forward. One reason for this could be large taxpayers believe they have a strong case and are willing to fight. A large number of such disputes not only create an environment of fear and uncertainty, which must be avoided, but also clogs judicial capacity and significantly raises the implicit cost of tax collection. With increasing digitisation, it should become relatively easy for the tax department to detect evasion. At the policy level, India needs to broaden its tax base significantly. Searches and seizures will not fix India’s long-term revenue problem.