The Author, Suchandra Mukherjee is a Fourth Year student of BBA LLB, University of Mumbai Law Academy. She is currently interning with LatestLaws.com.
INTRODUCTION: -
Taxation is necessary in all civilised countries for a variety of reasons, including financial development, societal upkeep, changing economic behaviour of people, and controlling the economy through fiscal policies. Tax collection is a driving force behind economic progress. A good tax system should be able to identify surpluses in the economy and tax them in a way that causes the least amount of harm to the productive activity. The real challenge for the nation is to treat the taxpayers of the country with fairness, justice and Equity.
Tax collection is a huge difficulty for tax administrators in poor countries. Large taxpayers in the country do not want to pay tax unless they are forced to do so. As a result, a system should be set up so that paying taxes is no longer a voluntary choice and morality for people. Penalties should be enacted to deter tax evasion. Penal provisions should be made such that tax evasion becomes a costly affair and should supplement the automatic extraction of taxes. In reality there are more option than just tax evasion, smarter and sophisticated taxpayers, practice risk free legal ways of non-payment of tax, which is called tax avoidance. Tax evasion is more common among the less rich and less well-informed, but tax avoidance is more common among the better-informed. As a result, the loss of revenue to the government in the event of tax avoidance is significantly greater than in the case of tax evasion. The tax collecting system should be designed to make it difficult for taxpayers to engage in tax evasion and avoidance.
CHALLENGES IN TAX COLLECTION: -
In developing countries like India, where capital formation is slow and the demand for funds is high, yet funds cannot be generated through taxation due to low GNP, the reliance on foreign debt would increase.
India, with a population of approximately 1391 million in the year 2021 is among the poorest of the economies of the world. It has a share of 17.7% in the world population but accounts for only 1.5% of the world GNP. Large Population with Unemployment and Underemployment India has a population density of roughly 2.5 times the population density of China and 11 times the population density of the United States.
Exemption in Agricultural Income – Agricultural income is exempt from the Indian tax system. According to the State List in the Constitution's VII Schedule, states have the authority to tax agricultural income. Under the guise of agricultural income, taxpayers attempt to claim a wide range of income. Agriculture still employs more than half of the population, and farmers constitute the most consistent vote bank for political parties. Nobody wants to annoy farmers. Plus, there is hardly any profit in agriculture, imposing a tax on agricultural income will not affect most of the farmers as they will remain under the exemption limit.
Exemptions on Commodities under VAT System: Similarly, exclusions for indirect taxes (such as VAT at the federal level) become vague and serve no obvious purpose. When a commodity is zero-rated, there is no tax on its sale, and the seller of the zero-rated item receives a credit for the tax paid on the inputs used to make it. By this procedure, a zero-rated commodity is freed from the entire tax burden. By contrast, if a commodity is exempted, then the sale is not subject to tax but the seller is also not entitled to credits of taxes suffered on inputs. As a result, there will be some taxation on the product, which will be borne by the end user. The actual tax rate is determined by the amount of value added by the manufacturer of exempted items. For a general VAT rate of 16 percent, the incidence of tax on a value addition of 100 percent is 8%, while for a value addition of only 25%, the incidence of tax on the exempted item is 12.8 percent. Thus, the exact incidence of tax is not known in the case of exempted items. Thus, Government policy is unclear in the case of exempted items.
Huge Black Economy: The existence of a large black economy causes governments to lose revenue due to tax evasion, as well as a loss of helpful productive activity due to the non-utilization of black money in a useful economy. The extent of the black economy in developed Organization for Economic Co-operation and Development (OECD) countries is substantially smaller than in developing countries. According to a report conducted by the International Monetary Fund (IMF) on the unaccounted segment of the economy, black money in India amounts to 50% of GDP. The amount of black money is increasing both in absolute and relative terms as a percentage of GDP. The black economy's income is growing at a quicker rate than the economy's overall growth rate. As a result of the underground economy, half of the country's GDP is tax-free, providing a severe problem for tax collectors and a threat to the economy's stability.
Heavy burden on the Corporate Sectors: The corporate sector is under the most strain under the current tax regime. The corporate sector accounts for the majority of tax revenue, whether it is excise, customs, sales tax, or income tax. The corporate sector, primarily industrial firms, accounts for 95% of indirect taxes. When a large part of taxes is collected through the corporate structure, corporations then pass this burden on to a small group of taxpayers (either shareholders or customers who buy their products and services), which is not conducive to healthy economic growth.
Very Low Percentage of GDP is Collected in Taxes: In India, tax collection as a percentage of GDP reveals significant disparities. In 2001, tax collection in affluent countries such as Sweden was as high as 50 percent of GDP. The stark disparity between rich and developing nations in terms of tax collection as a percentage of GDP Despite comparable, even higher tax rates in developing economies, there is a very high level of tax evasion and the presence of a huge black economy in developing countries. For example, in India, income tax rates are comparable to that of the United States but the incidence of indirect taxes is much higher in India compared to the United States.
THE REMEDIES: -
The failure of the income tax to tax agricultural income is the most fundamental flaw in the Indian tax system. Tax rates should be reduced, and penalties for tax evasion should be more severe. Most taxpayers will not be drawn to evasion as a result of lower tax rates, and those who are will be prohibited from doing so due to harsh penalty provisions. Individuals are more likely to reduce their productive activities in favour of leisure when marginal tax rates are higher. Higher marginal rates induce economic distortions by inhibiting or eliminating both specialisation and interchange. The high tax rates on corporate earnings provide a substantial incentive for business owners and managers to spend company assets on tax deductions, business-related items, and services that also yield personal satisfaction to individuals. That is why we see helicopters, swimming pools, five-star hotels, country club memberships, chauffeured limousines, and business meetings and vacations in exotic destinations. Because the cost of such facilities is currently only 60% borne by the corporation, and the remaining 40% is borne indirectly by governments in the form of non-collection of taxes.
Deterrence Against Tax Evasion: The criminal measures under Indian tax laws are insufficiently severe to serve as a deterrent. Furthermore, they give tax authorities much too much leeway, which leads to corruption. Discretions are not used in a transparent and equitable manner.
Real Estate Transfers: In most emerging nations, real estate transfers are a preferred source of illicit money as well as a preferred destination. All real estate transactions take done at a considerably lower paper price than the market value. This allows a buyer to use his untaxed funds and a seller to avoid paying income tax on the profit. The transaction consumes black money of the buyer and generates black money for the seller. There is also evasion of stamp duty, which is proportional to the value of transferred property.
Discouraging Cash Transactions: In India, tax compliance is extremely low, and the black economy is enormous. People will be forced to use banking channels, checks, credit cards, and other forms of payment if governmental changes make cash transactions unfeasible. When financial channels are employed, the system will keep track of income and expenditure, and the underground economy will be reduced in due course. Further, the universal identification number associated with persons will help in correlating their all-financial transactions.
CONCLUSION: -
In the massive burden of tax collecting, developing countries face a variety of problems and challenges. First, because of their low GDP, low rate of capital formation, poverty, unemployment, and increased population density, these countries have a tough time detecting economic surpluses. Second, because they mostly deal in cash, their chances of collecting taxes are further harmed. Third, because of a multitude of politically motivated tax exemptions and deductions, there is a lack of political will power to collect revenues, resulting in a restricted tax base. These countries' dispute resolution systems must be upgraded, and structural adjustments must be implemented to ensure that conflicts are resolved fairly and quickly. Taxpayers as well as government should be awarded the cost of litigation in case of frivolous and groundless claims of the other party.
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