The needless confusion created by two recent government decisions — one to collect tax at source (TCS) on credit card payments overseas and the other to recall Rs 2,000 notes by September 2023 without denotifying the currency — suggests that the Union government is still obsessed with tax collections and black money.
This is pointless harassment of the taxpayer and/or cash user for very little revenue gain.
Personally, I have advocated the withdrawal of the Rs 2,000 note years ago. I have also been a believer in tax deduction at source (TDS) for payments and incomes above a certain level.
However, nothing should be done in the name of fixing tax avoidance if it results in making taxpayer compliance problematic. The design of any tax regime must focus on the one thing that makes the taxpayer willing to comply, and that is convenience.
Unfortunately, this has not been the case with the Rs 2,000 note recall, and the TCS diktat on foreign currency transactions through credit cards, which have been modified after an outcry.
The Rs 2,000 note recall could easily have been done through direct deposits in bank accounts, where KYC (know your customer) norms already apply.
Note exchanges could have been focused on smaller towns and rural areas, where cash usage is more prevalent.
Given the spread of digital technology, big UPI players like Paytm, Google Pay and Phone Pe could have been asked to collect the cash and credit it directly to customer wallets or accounts.
Today, even the humble plumber or vegetable vendor gladly accepts payments through UPI, so anyone with any amount of cash to deposit could easily have been asked to deposit the money in any wallet or payment bank.
As for TCS on foreign travel payments, it is plain wrong. The optics are terrible. It gives the impression that the country does not trust its own people when they go abroad and spend using credit cards. It suggests that hoarding foreign exchange is now as important as it was in the past.
Clearly, a mindset change is called for in those who decide tax policies, including the Narendra Modi government. Here is what I think needs to be understood before tinkering with any tax policy.
First, Indians are not uncomfortable paying taxes — at least when compliance is painless and the rates reasonable. But they do not want the taxman rummaging through their financial bins looking for problems and signs of non-compliance.
Second, the government should aim for tax compliance through long-term incentivisation methods, and not by making avoidance tougher and tougher, where everyday transactions become part of the database on which a tax babu can harass taxpayers.
Post demonetisation, and post the changes introduced to improve taxpayer services and assessments, most people are paying up. This is success with small ‘s’, but it can be sustained only if rates move lower and compliance becomes a piece of cake, which is the case with most TDS payments.
In fiscal 2017-18 (assessment year 2018-19), some 5.87 crore people filed tax returns, but another 2.12 crore people paid taxes, but did not file returns.
This means that 26 per cent of taxpayers paid taxes (they probably got it collected at source), but did not file returns, probably to avoid having to disclose details or get into a guilty conversation with nosy tax scrutineers.
The tax data for fiscal 2021-22 shows a sharp rise in TDS collections as a share of total direct taxes to 39 per cent from 32 per cent in 2014-15.
The implication is clear: people are okay (or at least they won’t make a big fuss or try too hard to evade payments) as long as they can be spared compliance burdens.
This shows what tax approach will work best in the Indian situation.
1: Tax rates should not be more than 15 per cent for incomes below, say, Rs 1 crore. At this rate, most Indians will comply. This is what the TDS figures indicate, since TDS rates vary from as low as 1 per cent for property purchases to as high as 10-20 per cent for other payments. At a mid-rate of 15 per cent, compliance could dramatically improve through TDS.
2. Those earning above Rs 1 crore can be charged higher (maybe 20-25 per cent), at which levels even their compliance will be reasonable. You won’t find too many millionaires heading to the Caymans.
3. Corporate tax rates can also be cut to 15 per cent, but in stages. It is already at 15 per cent for new manufacturing units. Government should encourage corporates and wealthy individuals to invest in social programmes linked to education and health, apart from providing other basic services to the poor. This social spending can be incentivised, with every percentage of profits invested in such schemes being tax-exempt to a commensurate extent, subject to CAG or social audits.
4. Individuals should be encouraged to contribute to social groups and charities — temples, orphanages, community upliftment programmes — by allowing them to contribute directly from their salaries and/or regular incomes every month. If magazine and Netflix subscriptions can be done this way, why not contributions to good causes?
5. The goods and services tax rate should ultimately converge around 15 per cent, with two other rates, 5 per cent and 25 per cent, being applicable to just a few items.
The new tax focus should be to bring all rates, direct taxes, capital gains taxes, and goods and services taxes, to around 15 per cent.
It is the magic number around which most Indians would be likely to comply without heartburn. At 15 per cent, it is more painful setting up a workaround for tax avoidance than simply paying up.
India cannot become a $5 trillion economy quickly if its government is going to be obsessed with extracting every last rupee from its citizens as taxes. Taxes left in the hands of people are usually better spent than taxes paid to government.
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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