Question

Tax terrorism is seen as a major obstacle for our country with respect to ease-of-doing business. Elaborate. Suggest measures to simplify and streamline our tax collection process while improving our revenue position.

Answer 1

Approach

• Give a brief overview of tax terrorism with a simple and concise definition.
• Briefly explain how ease of doing business will get affected.
• Connecting various existing government initiatives, suggest more measures to improve the present system.
• Conclude on a positive yet serious note about the need for simple tax laws that will promote entrepreneurship and improve ease-of-doing- business.

Tax terrorism refers to the undue pressure exerted by tax authorities. It can also happen due to authorities following the letter of the law while neglecting the spirit of the law.
Tax terrorism may include application of a seemilngly small provision of the tax law and using it to stall the business activity of a corporate house. It can also include provisions to issue notices for violation of Corporate Social Responsibility provisions which in the grander scheme of things do not increase the revenue of the government directly. It can include the application of tax laws retrospectively making a business house always unprepared to be tax compliant.

Problems caused by tax terrorism

• Globally, capital and investments are quite mobile and will move to countries with a predictable tax regime and which offers a simple compliance system. Tax laws in India, however, are complex and complicated. This makes the interpretation of laws subjective and unpredictable.
• Companies usually plan for investments in advance and uncertain regulations hampers their plans and eventually robs the economy in the medium to long term.
• It also widens the inequities in power between the tax officer and the businessman.
• The revenue targets are changed periodically and hence the rules are at times changed without any intimation or warning.
• Hidden tax cost due to the complicated and ambiguous clauses in the tax law also increases the burden of litigation. The government also has to bear a fair share of this litigation cost.

Positive aspects of tax vigilance

It promotes a culture of compliance and hence improving the corporate culture of the economy.
It allows the government to mop up revenues that would have been lost otherwise due to evasive maneuvers by the business houses.
It helps plug the leakages in the revenue system bridging our deficits.
Tax revenue acts as a warning bell about the health of our economy. Tax vigilance gives enough room for the government to take corrective actions in case such warning signs surface.

Way forward

• Clear and achievable targets must be given to tax authorities.
• The proposal for a unified Tax code must be put on a fast track
• Changes in tax policies must intimated in advance and consultations must be held with all stakeholders.
• Special provisions must be made for foreign investors and MNCs which will ease the tax compliance regime.
• Provisions for automatic filings must be provided for all citizens, to streamline the tax collection process and to increase compliance.
• Tax litigation must be used as a last resort and there must be institutional mechanisms for arbitration and mediation

Lack of regulation and oversight might prove too costly for our economy. At the same time, a simple tax regime will go a long way in fostering a culture of tax-compliance. India needs to strike a balance where our revenue targets are met while remaining pro-enterprise.