The government should abandon the move to criminalise tax evasion , for multiple reasons. To begin with, this would reverse the entire logic of tax reform pursued since liberalisation began in 1991. The effort has been, since Dr Manmohan Singh presented his first budget in July 2001, to lower the rates of tax, simplify the tax structure and broaden the base, ultimately to collect ever larger amounts of tax.
Underlying the strategy shift in tax administration is the philosophy of liberalisation, which dethrones the all-powerful state from the commanding heights of the economy and puts, in its place, the animal spirits of entrepreneurship. Instead of seeing businessmen as presumptive criminals unless they prove themselves otherwise one by one, the new philosophy requires that businessmen be recognised as valued citizens who generate income, prosperity and welfare.
However, for businessmen to play this role, many things have to be organised beyond the level of the individual and at the level of the collective: national defence, internal security, macroeconomic balance, fiscal measures to dampen the volatility of business cycles, international relations, enforcement of contracts, social harmony, physical and social infrastructure. The more sophisticated these activities of governance, the more money it takes to finance them.
Total government spending as a proportion of GDP is upward of 30% in the OECD countries and since it is not wise to finance this expenditure out of borrowings on a scale upwards of 3% of GDP over a business cycle, most of this money has to come out of taxes. In other words, taxes are a necessary evil.
India's tax to GDP ratio is only about 17%, for the Centre and the states combined. India clearly has to collect more taxes, at the state and central levels. But this has to be done by lowering the incidence on individual taxpayers and widening the base of taxation further. Those who file income tax returns are less than 3% of the population.
Tax rates have come down from an all-time high of 97% during the Emergency to 30% now. Reform has created a large class of salaried employees whose taxes are deducted at source. Listed companies have the incentive to show rather than hide their incomes, so as to boost valuation on the market. A computerised tax information network gathers intelligence on the tax-base that still waits to be creatively tapped. Instituting a goods and services tax will complete tax reform, creating automatic audit trails for both direct and indirect tax potential.
There is scope to reduce tax rates further, and simplify tax rules so as to make compliance hassle-free. For this, the information gathered by the tax information network, for example on expenditure incurred by people who file returns showing disproportionately small incomes, or file no returns, has to be mined and the tax base widened to bridge the huge gap between the actual and the potential number of taxpayers.
The single most important reform required to clamp down on black money is to make political funding and expenditure wholly transparent. The thousands of crores of rupees required to make Indian democracy work is mobilised through corruption as unaccounted money at present.
Changing this is the real challenge before the government. Trying to demonise businessmen instead is sheer populism. The purpose of mobilising taxes is to enable governance. The purpose of governance is to enable human creativity in multiple ways, not to stigmatise those who deploy creativity to generate incomes as well as taxes.
Q1. Suggest a suitable title for the passage.
Q2. What is the main purpose of the passage?
Q3. Why are taxes indispensible for a country like India?
Q4. By OECD standards what is the deficit in India’s Tax to GDP ratio?
Q5. According to the passage how can tax collection be increased?
Q6. What are the meanings of the words in bold?