Taxman's accountability

Action against tax evasion should not be discretionary

The government’s thrust in recent policy, including in the Union Budget 2017-18, on increasing the tax base is welcome. India’s personal income tax base in particular, as officials of the government have argued, is too low for comfort. The attempt to lower the tax rate for those with relatively low taxable incomes should be seen in this light. However, other concerns have not dimmed with regard to taxation. In particular, the government should recognise that severity in tax administration and a less accountable taxman does not help it expand the tax net — indeed, quite the reverse. Some provisions of the Finance Bill in particular have caused disquiet. The Bill seeks an amendment to the Income Tax Act that would, with retrospective effect, insulate tax officials from having to explain — even to tribunals or other duly constituted authorities — why they had reason to believe that a tax assessee was concealing assets. 

This provision is disturbing because it raises the spectre of unaccountability. If assessment officers declare they have reason to believe, or suspect, that an assessee is concealing assets, then they can order a search operation.  If the Bill succeeds in amending the Income Tax Act, then this decision will be beyond review. This would have an unfortunate effect on the nature of tax administration in the country, and only increase fear of arbitrary behaviour. As such, it runs counter to the government’s broad stated thrust in this area, which is to make the tax administration more taxpayer-friendly. Data analysis of returns and bank accounts, with minimal human interface, will only take you so far. At some point, there will be a decision taken by an official; and the government must strive to make that decision accountable. These provisions of the Finance Bill will thus undercut the government’s claim that it is reducing discretion. If discretion is being reduced, why do tax officers need to be protected from scrutiny? Indeed, why would any investigation not be made on the basis of transparent criteria? Such reforms would increase confidence in the tax system.

In general, the government’s aim must be to induce people to join the tax system and the formal economy, not to coerce them. It may be tempting at this point to use the vast data amassed from the surge in bank accounts after the withdrawal of high-value currency notes in November to launch an invasive series of tax investigations. But such instruments should be used judiciously and with considerable oversight. They must be transparent and accountable. Indeed, if the tax base is to be expanded, then actual institutional reform of the tax administration must also be prioritised. It is unfortunate that there was not much forward movement on this count announced in the Budget. It is worth noting that there are already over 390,000 direct tax cases pending with various authorities. The resolution of such cases in a transparent and swift manner, and that new cases will not be launched in an arbitrary manner, should be a priority. Tax evasion is a serious problem, and the government is right to move on it. But unless the strategy to reduce tax evasion includes increasing public trust in the tax administration, it is doomed to fail.