A massive cash seizure, by the Directorate General of GST Intelligence (DGGI), from the premises of a gutka manufacturer in Kanpur had the unintended consequence of precipitating bitter slanging matches on TV channels, between spokespersons of sundry political parties, with every speaker alleging links between the raided person and rival political parties.
The unsavoury spectacle had its denouement in the PM, FM, UP CM, President of SP and other leading politicians joining the low-level debate. The public, always sceptical of the morality of politicians, were left wondering if all allegations made by political leaders against each other were true! Creditably, the DGGI, and its parent entity, the Central Board of Indirect Taxes (CBIC), kept away from the raging controversy. Playing by the rulebook, both CBIC and DGGI refrained from disclosing unnecessary details about the search, to the extent that even the names of the officers involved in the search were not revealed.
Perhaps, GST officials had learnt a lesson from the Mumbai drug bust, where a hunger for publicity had boomeranged, resulting in the Zonal Director of Enforcement Directorate being slandered by politicians while the accused, aided by expensive lawyers, came out as lily-white victims. According to information available in the public domain, wrong doing of the Gutka group was unearthed consequent to interception of a truck with defective papers in Gujarat. The modus operandi of GST evasion was simple enough; goods were under-invoiced by the Gutka group, so that e-Way Bills were not required for transportation.
Truck drivers carrying gutka consignments collected sales proceeds in cash, which was used to pay suppliers and employees. A question naturally arises, as to why the local intelligence units of the CBDT and CBIC were unable to detect the rampant tax evasion by the Gutka group, keeping in mind that Kanpur and Kannauj, are not exactly bustling with big businesses?
The answer may lie in the manner GST is administered. At the apex level, GST is administered by the GST Council consisting of the Union Finance Minister and State Finance Ministers. The Revenue Secretary functions as Secretary to the GST Council while the Chairperson, CBIC, is a permanent, non-voting invitee to the GST Council. Almost everything related to GST, including laws, rules and rates, falls under the purview of the GST Council.
Administration of GST at the operational level is divided between the Centre and States, with control over 90 per cent of taxpayers having a turnover below Rs.1.5 crore vesting with State tax administration and jurisdiction over the remaining 10 per cent vesting with CBIC. Taxpayers with turnover above Rs.1.5 crores are divided equally between State tax administration and CBIC. With such a complex structure, and absence of tax professionals at the top, administration of the GST Act has become a challenge.
It does not help that GST is levied in five different tax slabs: 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent. Additionally, there is a special rate of 0.25 per cent for rough, precious and semi-precious stones and 3 per cent on gold. A cess of 22 per cent on top of 28 per cent GST is levied on items like aerated drinks, luxury cars and tobacco products. Multiple tax rates force businesses to classify inputs and outputs based on the applicable tax rate which makes compliances onerous for small businesses.
Further, to claim input tax credit, a firm requires to match invoices between outputs and inputs; such exercises increase the compliance burden and the compliance cost, leading to evasion. Due to slow refund processing, working capital gets locked up, and complicated administrative processes often lead to frauds. Only 5 countries viz. India Italy, Luxembourg, Pakistan and Ghana have four or more GST rates. The World Bank’s India Development Update 2018, called India’s GST regime too complex. Interestingly, India has the second-highest GST rate among the 115 countries studied by World Bank.
Along with changes in the Indirect Tax regime, the last few years have witnessed profound changes in assessment and appeal procedures of the Income-tax Department. Earlier, the Income-tax Department had a decentralised working model with Income-tax offices being located at the remotest places for convenience of taxpayers, who could file their returns and access their Assessing Officer at a place close to their homes. Income-tax Officer in moffusil towns kept themselves well informed about the activities of taxpayers in their jurisdictions. Now with e-filing and jurisdiction-less, faceless assessments, local officers get little information about business activities in their area.
Previously, the Income-tax Officer could conduct surveys – a very effective intelligence gathering tool and a potent weapon against tax evasion ~ and advise the Investigation Wing about bigger cases of tax evasion. Presently, surveys and searches are actively discouraged with the power to order surveys and searches being vested with much more senior officers. The result is a paucity of local knowledge which means that cases like the Kanpur one go undetected. Probably, this is the price the Income-tax Department has to pay for its emphasis on centralisation of information and ‘non-intrusive investigation’ as opposed to old school intelligence gathering.
Even in the present technologically advanced times, a mixture of both may be required to catch tax evasion. It may be added that the Income-tax Department is yet to come to grips with the new procedures, with a number of cases being filed in High Courts by assessees alleging procedural irregularities by AOs, in assessment proceedings. The Department had to change the procedure for dealing with appeals, comprehensively, after some adverse observations by higher Courts.
Voluntary compliance by taxpayers, which is the basis of the present tax regime, can only come about if the Government collects revenue at a rate and in a manner that is acceptable to taxpayers. “Tax should be collected from people like a honey bee draws nectar from a flower, without harming it”, wrote Chanakya, in Arthashastra, circa 300 BCE.
Studying the relationship between tax rates and tax collection, economist Arthur Laffer, concluded that tax collection is maximum at a certain tax rate and a higher tax rate would result in reduced tax revenue because people would not have enough incentive to work hard. Rather, there would be more incentive to evade taxes.
Proceeding on Laffer’s theory, income-tax rates were cut drastically after the liberalisation of 1991. Consequently, collection of direct taxes increased from Rs.10,606 crore in FY 1990-91 to Rs.68,305 crore in FY 2000-01, to Rs.4,45,995 crore in 2010-11 and to Rs.11,37,685 crore in FY 2018- 19. Applying this principle to the GST regime, reduction in rates, simplification of processes, moving towards one slab of taxation, all may be required to increase voluntary compliance.
Another thing to be kept in mind is that Direct Taxes are progressive, aimed at the rich, while Indirect Taxes are regressive, affecting the poor more than the rich. Advanced economies collect most of their tax revenue from Direct Taxes. As the Indian economy matured, Direct Tax collection, which was only one fourth of the Indirect Tax collection in the 1980s, overtook Indirect Tax collection in FY 2007-08, progressively increasing to 56 per cent of total tax revenues in FY 2013-14 and FY 2014-15.
Reversing this trend, the present Government increased GST rates across the board and imposed extortionate levies on petroleum products, which did yield extra revenue but at the cost of inflation, a slowing economy, and a distorted tax structure, with Indirect Tax collection consistently exceeding Direct Tax collection after FY 2018-19.
A clear message from the Kanpur episode is that the cash economy is alive and kicking. Probably, instead of outlawing cash, the Government should try to integrate the cash economy in the formal economy. Also, Direct and Indirect Tax provisions should be harmonised. That said, ersatz solutions like tinkering with tax rates cannot solve the deep-rooted structural problems of our tax system. A Direct Tax Code has been in the offing since 2010 and was last heard about in 2020, but nothing concrete has emerged, so far.
In fact, looking to the changes in the business environment, a comprehensive tax code encompassing both Direct and Indirect Taxes is required. Great Britain, from where we inherited our tax system, has integrated Direct Taxes (Inland Revenue) and Indirect Taxes (Customs and Excise) under Her Majesty’s Revenue and Customs Board in 2005. Similarly, the US IRS Code 1986 encompasses both Direct and Indirect Taxes. We have to proceed on similar lines so that the Indian tax system works as an integrated whole ~ not in separate silos of GST Council, CBIC and CBDT.
(The writer is a retired Principal Chief Commissioner of Income-Tax)