Ceasing to scare the people of taxes is not just limited to lowering them or implementing a stable, non-retrospective tax structure. It also involves successfully reducing the routine harassment caused to individuals and businesses during their encounter with tax officials
One of the fundamental reasons for advocating a small and limited State is best reflected in the clichéd yet ever-relevant maxim by Lord Acton, an English historian, politician, and writer: “Power tends to corrupt; absolute power corrupts absolutely.” A big government, by nature, implies that power is concentrated among a few, elite men who may potentially misuse the entrusted authority by imposing their arbitrary whims on the public.
Being a centrally planned economy characterized by excessive State interference in public affairs, India has seen way too many instances of the widespread misuse of bureaucratic authority. A recent example concerns Section 14 of Central Excise Act of 1944. This section gives unwarranted powers to the central excise officer. Take for instance the power to issue summons to “any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry which such officer is making for any of the purposes of this Act.”
On the surface, this provision may not appear inimical. But on the ground, it has often been used as weapon to exhibit obnoxious supremacy and command over for-profit corporations. Even in cases where a simple letter or telephonic conversation would have sufficed in gathering information and documents pertaining to loss-of-revenue investigations, the excise officials have been known to issue summons to the top functionaries of the companies, thereby requiring them to be personally present with relevant documents.
Not surprisingly, such laws and their potential for misuse continue to contribute to the abysmal level of economic freedom of the country which, according to Heritage Foundation’s latest report, has fallen in 2015 despite Modi government’s attempts to make India more business- and taxpayer-friendly.
In response to this issue, the Finance Ministry issued a circular on 20 January to the central excise officials asking them to restrain from issuing summons to top executives such as CEOs, CFOs, general managers of large companies or PSUs unless “as a last resort when it is absolutely required.” It further clarified that “they should be summoned only when there are indications in the investigation of their involvement in the decision making process which led to loss of revenue.”
This is a welcome step, but why only large companies? Are the executives of small and medium enterprises not busy or important enough to the economy to be mentioned in the circular? Plus, similar circulars have already been issued earlier, one in the year 1989 and another in 2007. To be sure, the recent circular duly takes note of this fact, yet fails to be any different in substance. The question then remains as to how this directive will be implemented on the ground level. Did the earlier circulars succeed? If they did, why the need to issue one more this time?
If misuse of authority is the cardinal problem, a long-term solution lies in limiting unwarranted authority, not in issuing intermittent circulars that superfluously aim at appealing to bureaucrats’ subjective values. It lies in creating institutional and systemic changes that last long after the present government is out of power. It lies in creating incentives that prompt the government officials to leverage their self-interest to the benefit of the society.
Ending ‘tax terrorism’, after all, is not just limited to lowering taxes or implementing a stable, non-retrospective tax structure. It also involves successfully reducing the routine harassment caused to individuals and businesses during their encounter with tax officials.
A good example of systemic change, as opposed to the sporadic issuance of directives to the tax officials, would be to shift their focus away from requiring specific revenue targets to be achieved. Relentless focus on “targets” acts as a major disincentive to conducive and non-adversarial tax collection practices.
President of FICCI Jyotsna Suri, in a recent pre-Budget consultation with Finance Minister Arun Jailey, elucidated on this issue, saying, “The overwhelming focus of the government machinery on revenue ‘targets’ puts too much pressure on the tax officers to maximise revenue collections leading to arbitrary assessments, denial/delay in sanction of refunds, disputes and unwarranted litigation. Revenue generation is primarily dependent on the economic activity in the country; revenues cannot be enhanced by prescribing artificially high targets for the tax officers.”
The point also being that “be good, do good” type circulars do little to help change the system, which is primarily driven by individuals seeking the fulfilment of self-interest. Given this, the government must look beyond just noble intentions. It must veer towards effective, incentive-based policies and structural reforms that are focused on dismantling the bloated bureaucracy, even if in an incremental manner.