Search for tax evasion

News:  The tax department has conducted a record level of searches in the current fiscal year. As reported by Business Standard last week, so far, the department has found an undisclosed income of Rs 32,000 crore.

While it is encouraging that the tax department is working hard to make sure that everyone pays his or her share. However, the basic issues linked to tax collection have not been resolved.

What are the issues in India’s present tax regime?

First, the tax-to-GDP ratio in India remains low and stagnant. Consequently, weak revenue collection puts pressure on government finances and limits the capacity of both the Central and state governments to spend on developmental needs.

Second, the underperformance of GST has put more pressure on direct tax collection.

Third, The Finance Act, 2017, did away with the need for tax officials to declare to a court as to why in their opinion a search is necessary.

Tax officials have now been given the powers to search if, they believe to have credible information that income has escaped assessment over the last three years.

This has predictably increased the level of searches and will affect taxpayers.

What are the issues/challenges due to increased scrutinization?

First, only a small fraction of what the tax department has found, ultimately, reaches the treasury. For instance, in 2018-19, it filed over 3,500 cases for prosecution and got convictions only in 105.

Second, it has also resulted in numerous disputes with taxpayers. Many such disputes create an environment of fear and uncertainty. Further, it also burdens judicial capacity and significantly raises the implicit cost of tax collection.

What measures were taken by the government to reduce income tax disputes?

The government introduced the Vivad se Vishwas scheme in 2020 to settle direct tax cases with the disputed tax amount of about Rs 9.7 trillion in over 500,000 cases.

It is reported to have settled cases involving about Rs 1 trillion. However, most of these were disputes with relatively small amounts, and large taxpayers did not come forward.

What is the way forward?

With increasing digitisation, it should become relatively easy for the tax department to detect evasion.

At the policy level, India needs to broaden its tax base significantly.

Source: This post is based on the article “Search for tax evasion” published in Business Standard on 17^th Jan 2022.