ECONOMIC HIGHLIGHTS
New Delhi, 15 December 2005
Revenue Shortfall, But……
No More New Taxes, Plug Loopholes
By Dr.Vinod Mehta
The
economy is buoyant, yet the total revenue collections this financial year again
may fall short of the expectations. This
has almost become an annual feature now. The economy keeps growing and so does
the deficit, while the revenues do not increase in the same proportion as the
economy grows. The shortfall in revenue collection ultimately affects social
spending and development of infrastructure. It is being apprehended that the
Finance Minister may raise the indirect taxes or may bring in more transactions
under the tax net: For instance, it is reported that the Finance Minister is
thinking of bringing some more financial services in the ambit of tax. But that
will not solve the problem.
There could be a number of reasons for shortfall in revenue
collection, which may vary from year to year like recession in the industrial
sector or shortfall in agricultural production. But one factor that has been
constant for the last five decades is the tax evasion. There are so many
loopholes in the tax system that allows people and organizations to evade taxes
with impunity.
There are no reliable estimates of the extent of tax evasion
in this country. But available studies
on black money show that the size of such money has grown significantly over
the past many years. If this tax evasion
were checked, the Finance Minister would never be faced with shortfall in tax
collection and would have a very low or zero deficit. Therefore, the Finance Minister instead of
resorting to increase in tax rates, bringing in more transactions under the tax
net or coming out with amnesty schemes, should find other means to increase the
revenue collection. One such way is to
plug the loopholes, which encourages tax evasion. The current budgetary exercise may address
this question.
Tax evasion is there almost in every country. But the degree
varies. Most of it occurs when
transactions are done in cash and never recorded. This has been the experience of many
countries. So, some of them have come
out with measures that discourage cash transactions and encourage recorded
transactions. One such mechanism has
been the use of debit and credit cards combined with payment through banking
mechanism. The use of credit and debit
cards is increasing in India
and needs to be further encouraged.
It has
been reported that the Republic
of Korea has been using
debit cards and credit cards very effectively to curb tax evasion. The South Korean Government allows 10% rebate
in taxes if the payments are made through credit/debit cards. This is an idea which needs to be adapted to
Indian conditions. The Finance Minister should come out with such a provision,
which encourages cashless transaction.
As a
first measure it may be made mandatory that all salaries above a certain
amount, say, Rs. 10000 per month, both
in the public and in the private sectors, be directly credited to individuals’
accounts in their respective banks.
Secondly, payments above a certain amount may also be made mandatory
through debit/credit cards and through cheques or bank drafts. It is better
than taxing money withdrawals. With electronic banking gaining importance,
transfers through banking mechanism will become as easy as receiving or making
payments by cash. In most of the
countries the use of debit and credit cards for making and receiving payments
has reached a point that for buying even one small ball pen payment is made
through credit/debit card.
Similarly,
the payment for the sale and purchase of immovable property, various kinds of
consumer goods and services beyond a certain stipulated amount should also be
made mandatory through banking channels.
While doing so the Finance Minister will not only be plugging one of the
biggest loopholes leading to tax evasion but would also reduce the need for
ready cash and hence the printing of currency notes on a large scale.
The
biggest chunk of black money is invested in real estate and gold. The
circulation of black money in the housing sector is beyond someone’s
imagination. Since the house tax is based on the current purchase price only
one fourth of the money is paid by cheque
and the rest in unaccounted cash. Even the honest buyer of flats/houses
is forced to pay in black money to acquire a flat or a house.
Additionally
the Finance Minister by encouraging use of plastic money for purchasing foreign
currency for making payments abroad would also be curbing hawala racket
that has been responsible for all the illegal and terrorist activities in this
country.
As the debit and credit cards are now becoming important,
the Finance Minister had wisely relaxed last year the rules pertaining to the
purchase of foreign exchange by individuals and organizations. Since the money in foreign exchange can be
withdrawn by an individual in any part of the world from its own personal
account, or make payment for goods or services purchased abroad against
debit/credit card, it will immediately get recorded automatically. If the money so withdrawn is up to the limit
laid down by the RBI no question need be asked.
However, if the money so withdrawn in foreign exchange exceeds the
amount laid down by the RBI only then the person may be asked to inform the RBI
as to the purpose for which the foreign exchange was used.
The tax amnesty schemes in the past have not been helpful in
checking tax evasion and curbing the black money in this country. It has only punished the honest tax payers.
So long as cash transactions continue to be made tax evasion will continue to
be there and black money will continue to be generated. It is high time the Finance Minister starts
thinking in terms of developing mechanism to encourage recorded transactions
instead of cash transactions. With computers all around, it would be much
easier to administer cashless transactions rather than cash transactions and
thus check tax evasion to a significant extent.
It appears that the Income Tax Department has already done
much of the homework and it is being made mandatory to quote PAN number while
making deposits above a certain amount.
But this needs to be followed rigorously. There should not be another
tax amnesty scheme. But the Finance Minister’s emphasis should be on checking
the growth of black money and penalize the tax evaders.
Also, efforts should be made to do something to reduce stamp
duty, property taxes as well as other kinds of taxes to encourage recorded
transactions.
(Copyright, India News and Feature
Alliance)
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