End taxing times

End taxing times

Tax harassment will end only when policy and officials’ incentives change.

Last week, in an address to officials in the tax department, finance minister Nirmala Sitharaman said they needed a mindset change to deal with an informed citizenry. She echoed Prime Minister Narendra Modi’s call for an end to harassment of honest tax payers. The intent deserves praise. It also lies at the heart of an attempt to ease the lives of both wealth creators and other citizens. But intent by itself will not end harassment. That requires reform in both tax policy and the incentive structure for enforcement officials.

Tax harassment has its roots partly in the government’s insatiable need for revenue. Revenue targets are often fixed without taking a realistic view of economic momentum. If data emerges, as is the case this year, that targets are clearly out of sync with economic growth, it puts pressure on tax officials to find unusual ways to meet it. In this scenario, harassment and questionable practices are a foregone conclusion. Therefore, if government is sincere about its desire to end tax harassment, it needs to take the first step by setting a target which is realistic. Also, tax changes proposed in the budget need to be based on a more rigorous analysis of potential consequences.

On the policy side, India has a chance to soon reform its direct tax regime. A new report on direct tax reforms is due. It should propose a regime which removes the complications of numerous exemptions. Simultaneously, there needs to be a reduction in tax rates. A wide base, accomplished by eliminating exemptions, will make it feasible to reduce rates. An added benefit is that a simpler tax code will lower the incidence of disputes. India needs to move to a place where tax policies and attendant enforcement do not discourage investment.