There have been a plethora of suggestions and requests for various changes in the budget, both on the revenue and expenditure sides, before it is formally announced on the 1st of February. This is expected given that every constituency would like to derive some benefit from the budget. This can be lower tax payments by individuals and companies or higher expenditure outlays by the government in different sectors.
This is understandable given that the country is going through a fairly anomalous situation. India is the fastest growing economy, which means that we are doing much better than any other large country. Yet, there are concerns voiced on consumption and investment. Therefore, every advocacy group has something to ask from the government. Not surprisingly, post-budget there will also be a call for lowering of the repo rate.
But there are certain things that the budget can do that will involve only marginal administrative costs but can deliver a lot on ease for the entire tax paying community. There could be some changes made to ensure that paying taxes should become easier for the public by using the advanced digital technology architecture already in place. Let us see how this can work out.
The government has made a lot of progress in generating what are called forms 26 AS as well as the AIS for the taxpayers. The first one captures all income earned where there is a tax paid by the individual. The latter captures all the flows to the individual, which can be even a dividend of say, Rs 10 from a company. The issue is that these forms are available only after the year has ended and another 2-3 months have passed. The reason given is that several payments made by entities, for a financial year, have the grace period of paying post March 31st while treating it as one for the year gone by. Therefore, there would be a gap in recording the same.
However, if on a monthly basis starting in April of the year, both these statements are made available to individuals on a real-time basis, it would be convenient to calculate the income earned, which, in turn, makes it easier to pay the advance tax. Advance tax payments are required so that the administrative machinery can function. But individuals cannot gauge what their income would be, as a lot of this would come in the form of dividends, which cannot be conjectured at the beginning of the year or even the quarters. Hence, having such a statement makes it easier for advance tax payments to be made. In fact, the government, too, can be sure of receiving these payments, as often there are large amounts paid post May/June just before the returns are filed. This is something that can ease the process of paying taxes and will be beneficial for both sets of stakeholders.
Another area of convenience is the concept of tax deduction at source. Today, there are different rules regarding the amount of tax that would be deducted at source for various payments that are made ranging from commercial transactions to interest on deposits to dividends earned. The rationale is that the government should be receiving tax revenue all through the year to meet expenses, and individuals can pay the balance through the advance tax window. In case they are not subject to paying taxes, which can be the case for the retired gentry as income is below the threshold levels, separate forms can be filled out to eschew such deductions.
However, for a tax paying middle class, it would be convenient to pay the tax upfront rather than calculate the same at the end of the year, as stated earlier, and pay a large quantum of advance tax (often with a late fee/interest). As the system has gone through high levels of digitisation, it is possible to let the recipients inform the entity making the payment of the tax bracket that is involved. Hence, banks can be told by the deposit holder that the tax rate is 10% or 20% or 30% or whatever so that the full amount is deducted. Here again, both the government and the individual would benefit. In case a person still wants to pay only the minimum tax rate and remit the balance later on, it can still be permitted.
The tax administration has come a long way with the improved technology that has been used, with the AIS and 26 AS being the manifestations of the same. With most payments now being linked to the PAN card, which in turn is linked to Aadhar, there is virtual full coverage of all taxpayers and flow of funds. With these improvements in place, the government can focus on easing the process of paying taxes, which will lead to quicker payments to the government. The present system involves a lot of time being spent by the taxpayer, who often could pay higher advance tax and then seek a refund. For those who fall short of paying the advance tax, there is a penalty interest charged. A delayed payment for the refund would again involve a token interest paid by the government. All this can be avoided by leveraging technology and informing the citizens of their recorded income and tax liability.
As the government is focused on making it easier to do business, a similar charter must be drawn up when it comes to paying taxes. There is already a lot of progress made by the Income Tax department with the two forms mentioned as well as a dummy returns form (which is still a work in progress). By also enabling complete knowledge of various incomes earned by the tax payers, it would become easier to pay the advance tax or a higher tax deducted at source, which would benefit the government also. This is something that can be taken up without any controversy.
The author is Chief Economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.
