Estimates may vary, but clearly, the size of the black
economy is monstrously large. Several factors are responsible for this. The type
of faulty T R Rustagi, Ex-Joint Secy, Union Finance Ministry tax structures that
we designed for ourselves, the ineffective and inefficient manner in which we
implemented and enforced the tax laws and the lukewarm societal disrespect
towards tax evaders have all contributed to the mess we are in. Surely, the
problem is not acute — it’s chronic. Perhaps we need to move forward in all
directions with a bold and renewed agenda.
Take indirect taxes. The
goods and services tax (GST) has the merit of
self-policing. The confluence of different central and
state taxes and duties in the holy GST is the right
answer to correct the historical wrongs. But much would
depend on the design of GST. It must be comprehensive to
cover goods and services alike.
Ideally, it should have one rate for goods and services.
Unduly high GST rates or a differentiated tax structure
would again throw back the old problems of
implementation, avoidance and evasion. Alongside, we
need to provide a world-class modern and efficient tax
administration using IT and reduce compliance cost for
the assessees.
As for direct taxes, history is the best teacher. The
experiment with high tax rates with zeal to punish the
rich failed miserably. The narrow tax base has eroded
the revenue buoyancy. The complicated tax laws and
procedures erupted in unholy alliances.
It is high time to realise that moderate tax rates that
are perceived as not ‘pinching’ by the society can only
induce the tax evader to change his heart. In fact, a
flat tax rate of 10% or 15%, with most tax collected as
tax deducted at source (TDS), is best suited to
accelerate transition from black to white.
Finally, a new approach in tax administration — for both
direct and indirect taxes — is called for. People’s
aversion to tax departments seems to have gone beyond a
simple dislike for paying taxes. The tax laws and
procedures must be rewritten. Those who wish to mend
their ways and pay taxes or duties should be encouraged
rather than punishing so heavily that they turn
indifferent.
