Tax" has always been a dirty word. It is dirty for the people who pay, who evade and who collect. Those who pay, don't really want to pay but do so either out of compulsion or perhaps because they don't have the option to evade. They are never really given due recognition despite being the venerated four per cent who pay taxes for the remaining 96 per cent of Indians. Those who evade also have their reasons - e.g. high tax rates or justification of the logic "most don't pay, so why should I?" The collectors are a demoralised lot; professionally, they never meet their performance goals and personally, they are looked upon suspiciously and only respected out of fear. So, no one is really happy.
A more friendly, transparent and intelligent tax ecosystem could be implemented. That ecosystem should aim to give a seamless experience to tax payers and create an amiable relationship between a genuine taxpayer and taxmen.
Four programmes of the Government of India - Digital India,Jan Dhan Yojana (JDY), GST implementation and Bharat Bill Payment System (BBPS) - weaved together, have the potential to create such an ecosystem. It can curb generation and enable recovery of black money and increase the government's revenues significantly to support the broader objective of Bharat Nirman. More importantly, a system that incentivises volitional tax-paying behaviour is likely to be more effective in broadening the tax base than creating policies inclined to beat up tax evaders.
First, India can be the first country ever to adopt a "One Bill" policy. It means that all financial transactions across India for trade of goods and services, no matter how small, is billed through one universal billing system. Today's technology maturity can make this happen. It should be internet-based, made ubiquitous through mobile smartphones and can be hosted on a cloud platform. Every transaction will require PAN/TIN numbers of the buyer and seller. The transacted amount and GST paid will flow into the 26AS statement for individuals and an equivalent statement for companies. There will be no need for paper invoices.
Such a system will provide every seller of goods and services a credible, easy-to-use, universal and cutting-edge invoicing system, bring all financial transactions in the white economy, discourage under-invoicing and over-invoicing, ensure transparent accounting of tax collected and deposited and eliminate "kachcha" bills. Taxmen, on the other hand, will have a platform to detect evasion accurately and perform surgical enforcement operations with undisputed data. Most importantly, this can bring the black economy into the tax net.
The success of this system is based on the principle of a backward propagation of pressure in which the end-consumer will forcibly drive sellers of goods and services to declare their actual revenues and deposit tax collected from them instead of making windfall profit from it. Volitional adoption will be key to success - i.e. the more people insist that sellers give bills, the more the white economy will grow. Consumer awareness campaigns have been trying to educate people but have not been effective.
Encouraging people to adopt this system is the answer. The government must reward the taxpayer for generating more white money. If people are allowed to reduce their taxable income by a percentage of GST that they pay for purchase of goods and services over and above income tax, it will incentivise everyone to demand bills from sellers. Unbilled transactions, a major contributor to the shadow economy, will reduce. Sellers who continue to operate in black will be eventually eliminated by market forces.
There is no dispute that the shadow economy is big; estimates vary between 22 per cent and 30 per cent of the GDP based on Friedrich Schneider's report of The Institute of Economic Affairs and Indian think tanks. That is a whopping Rs 25 to 34 lakh crore. If the government fixes the GST rate at 20 per cent, every one per cent reduction of the shadow economy will bring Rs 16,000-22,000 crore additional revenue receipts per year! Considering the US and UK black economy at eight per cent and 12 per cent of GDP respectively, if India can bring its own down to 10 per cent, an additional Rs 2-4.5 lakh crore will accrue to the exchequer every year. This can double the current planned expenditure of the government.
The One Bill system can be implemented as an extended module of the BBPS, which is currently under implementation but with a much higher degree of artificial intelligence, technology power and integration with the income tax system. One Bill will be the universal billing system and BBPS the universal payment gateway. The benefits of building such a system would far outweigh the investment required for it.
Three other supporting initiatives will further help the cause. First, elimination of Rs 1000, Rs 500 notes and having fewer Rs 100 notes in circulation. With the success of JDY and the direct cash transfer mechanism, a large population now has a bank account and we have a proven system that enables direct transfers. We really don't need a big cash economy.
Second, the velocity of adoption will increase if the government fixes a high rate of GST. Although it will artificially inflate the price of every commodity, this can be used as a mechanism to make transactions in black prohibitively expensive. Imagine, getting a refund of a part of the GST amount credited to your account the moment you complete the transaction in white!
Third, the IT department must show every tax payer the mirror of their income, spending and taxes paid. Doing so will improve the IT department's image as a transparent enforcement body and will also put pressure on individuals to pay taxes on time. If everyone finds a simple monthly statement of total income, total tax paid and total expenditure from their IT department, more people will comply and pay taxes on time.
Let us accept that it is grossly unfair to tax four per cent of the population, which contributes about 16 per cent of total government tax revenue. If India can double the tax-paying population and reduce the shadow economy, leveraging technology under the ambit of Digital India, it is possible to dramatically cut the budget deficit, in which case, it is time to give the real Indian taxpayers money back in their pockets. The FM should provide a roadmap for drastically reducing income tax rates, similar to what he has done for corporates this year.
A more friendly, transparent and intelligent tax ecosystem could be implemented. That ecosystem should aim to give a seamless experience to tax payers and create an amiable relationship between a genuine taxpayer and taxmen.
Four programmes of the Government of India - Digital India,Jan Dhan Yojana (JDY), GST implementation and Bharat Bill Payment System (BBPS) - weaved together, have the potential to create such an ecosystem. It can curb generation and enable recovery of black money and increase the government's revenues significantly to support the broader objective of Bharat Nirman. More importantly, a system that incentivises volitional tax-paying behaviour is likely to be more effective in broadening the tax base than creating policies inclined to beat up tax evaders.
First, India can be the first country ever to adopt a "One Bill" policy. It means that all financial transactions across India for trade of goods and services, no matter how small, is billed through one universal billing system. Today's technology maturity can make this happen. It should be internet-based, made ubiquitous through mobile smartphones and can be hosted on a cloud platform. Every transaction will require PAN/TIN numbers of the buyer and seller. The transacted amount and GST paid will flow into the 26AS statement for individuals and an equivalent statement for companies. There will be no need for paper invoices.
Such a system will provide every seller of goods and services a credible, easy-to-use, universal and cutting-edge invoicing system, bring all financial transactions in the white economy, discourage under-invoicing and over-invoicing, ensure transparent accounting of tax collected and deposited and eliminate "kachcha" bills. Taxmen, on the other hand, will have a platform to detect evasion accurately and perform surgical enforcement operations with undisputed data. Most importantly, this can bring the black economy into the tax net.
The success of this system is based on the principle of a backward propagation of pressure in which the end-consumer will forcibly drive sellers of goods and services to declare their actual revenues and deposit tax collected from them instead of making windfall profit from it. Volitional adoption will be key to success - i.e. the more people insist that sellers give bills, the more the white economy will grow. Consumer awareness campaigns have been trying to educate people but have not been effective.
Encouraging people to adopt this system is the answer. The government must reward the taxpayer for generating more white money. If people are allowed to reduce their taxable income by a percentage of GST that they pay for purchase of goods and services over and above income tax, it will incentivise everyone to demand bills from sellers. Unbilled transactions, a major contributor to the shadow economy, will reduce. Sellers who continue to operate in black will be eventually eliminated by market forces.
There is no dispute that the shadow economy is big; estimates vary between 22 per cent and 30 per cent of the GDP based on Friedrich Schneider's report of The Institute of Economic Affairs and Indian think tanks. That is a whopping Rs 25 to 34 lakh crore. If the government fixes the GST rate at 20 per cent, every one per cent reduction of the shadow economy will bring Rs 16,000-22,000 crore additional revenue receipts per year! Considering the US and UK black economy at eight per cent and 12 per cent of GDP respectively, if India can bring its own down to 10 per cent, an additional Rs 2-4.5 lakh crore will accrue to the exchequer every year. This can double the current planned expenditure of the government.
The One Bill system can be implemented as an extended module of the BBPS, which is currently under implementation but with a much higher degree of artificial intelligence, technology power and integration with the income tax system. One Bill will be the universal billing system and BBPS the universal payment gateway. The benefits of building such a system would far outweigh the investment required for it.
Three other supporting initiatives will further help the cause. First, elimination of Rs 1000, Rs 500 notes and having fewer Rs 100 notes in circulation. With the success of JDY and the direct cash transfer mechanism, a large population now has a bank account and we have a proven system that enables direct transfers. We really don't need a big cash economy.
Second, the velocity of adoption will increase if the government fixes a high rate of GST. Although it will artificially inflate the price of every commodity, this can be used as a mechanism to make transactions in black prohibitively expensive. Imagine, getting a refund of a part of the GST amount credited to your account the moment you complete the transaction in white!
Third, the IT department must show every tax payer the mirror of their income, spending and taxes paid. Doing so will improve the IT department's image as a transparent enforcement body and will also put pressure on individuals to pay taxes on time. If everyone finds a simple monthly statement of total income, total tax paid and total expenditure from their IT department, more people will comply and pay taxes on time.
Let us accept that it is grossly unfair to tax four per cent of the population, which contributes about 16 per cent of total government tax revenue. If India can double the tax-paying population and reduce the shadow economy, leveraging technology under the ambit of Digital India, it is possible to dramatically cut the budget deficit, in which case, it is time to give the real Indian taxpayers money back in their pockets. The FM should provide a roadmap for drastically reducing income tax rates, similar to what he has done for corporates this year.
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