Tax reforms Needed to Increase Tax Mobilization

Under-reporting and tax evasion are one of the major hurdles in resource mobilisation. This needs to be addressed by plugging the loopholes in the tax laws.

Tax reforms

Individual tax mobilisation

• The law does not require filing of returns if the income is below the taxable threshold of Rs 2.5 lakh.
• Professionals who can manipulate their accounts never appear on the radar of the taxman.
• Hence the law should mandate filing of returns by all professionals and proprietorship businesses regardless of their profit.
• This will increase compliance by enabling the taxman to scrutinise suspicious cases.
• Moving to wealth tax from income tax because the wealth level is harder to manipulate; therefore, the tax is harder to evade.

Companies

• The tax law allows offsetting of past losses against future profits.
• Definitions of admissible expenditures are susceptible to easy manipulation.
• These are used by the companies to manipulate the profit levels.
• The numerous tax exemptions also come in handy for tax avoidance. Big corporates benefit more from these exemptions.

Building deterrence

• The Income Tax Department has a very poor win rate before the appellate tribunal and the higher judiciary. Hence there is a lack of credible deterrence mechanism.
• Hence there is a need of deterrence power of the law, which depends on the likelihood of punishing tax evaders along with imposing a fine.

By integrating the GST, the income tax and the Ministry of Corporate Affairs’ databases there will be increased odds against the evaders.

Topics: GS-III: Indian Economy Issues Relating to Planning