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Revenue Shortfall, But……:No More New Taxes, Plug Loopholes, by Dr.Vinod Mehta,15 December 2005 Print E-mail


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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