India: Changing Compliance Landscape Towards A Wider Tax Net

Last Updated: 15 February 2017
Article by Maulik P. Doshi

On 31 December 2016, Prime Minister Narendra Modi shared a statistic that sparked curiosity amongst many – only 2.4 million people in India report a taxable income of more than INR 1 million. This revelation resulted in a series of newspapers quoting reports pointing to income indicators. For example, 2.5 million luxury cars are sold in India every year.

In his budget speech of 2017, the Finance Minister also shared similar statistics. For instance, out of 1.39 million companies in India, only 0.59 million companies have filed their tax returns for the year ending 31 March 2016. Out of 7.6 million individual taxpayers declaring income above INR 500,000, 5.6 million taxpayers belong to salaried class. Indicating the low level of tax compliance in India, The Finance Minister remarked that "We are largely a non-tax compliant society".

This glaring disparity between the reported income and the perceived number of people in the high income group, in the Prime Minister's own words, could invoke satirical laughter or anger! The Economic Survey of 2015-2016 observed that only 5.5% of earning individuals form a part of the tax net. While the government has shared such statistics to draw attention to the extent the menace of black money and tax evaders go, it has also been subtly widening the tax net to facilitate the identification of tax evaders. This has been broadly done by expanding the scope of compliances, increasing the use of technology for faster processing of compliance data, interlinking data between different divisions of the government and initiating punitive actions against non-compliance. The government has also proposed to introduce a mandatory fee of INR 5,000/INR 10,000 for delay in filing of income-tax returns.

The government has expressly stated its intentions to simplify tax laws through a reduction in tax rates along with the removal of tax exemptions. The government seeks to maintain its revenue base by increasing the tax compliance net.

Accordingly, over a period of time, the government introduced certain compliance mechanisms which help gather relevant information in this regard. The government is increasingly relying on businesses to assist in collating and furnishing relevant information at regular intervals. For instance, the Tax Deducted at Source (TDS or withholding tax) reporting regime has seen frequent modifications in recent years, each aimed at closing compliance gaps. The government has also launched a separate website to deal with TDS matters (TDS Centralised Processing Cell) and is focusing on electronic data processing and report generation. A mistake in TDS returns now results in a tax demand notice in a matter of few days!

The scope of reporting under the Annual Information Return (AIR) has been expanded and more transactions are now being reported to the government. For instance, cash sales in excess of INR 200,000 per transaction are now being reported to the government through AIR reporting as well as Tax Collection at Source statements. On similar lines, for receipts in cash in excess of INR 300,000 from a person either during a day or in relation to a transaction/event, the government has proposed to impose penalty equal to the amount received.

The Income-tax Return forms have also been modified to facilitate data-linking. Almost all taxpayers are required to file their tax returns electronically. For individuals, the passport number is also required to be quoted in the tax return, and there are reports stating that quoting an individual's 'Aadhaar' number will soon be mandatory.

The TDS credit and Value Added Tax (VAT) credit to be availed by a taxpayer is now linked to the data furnished by the tax deductor or the seller. This has compelled taxpayers to work with the government, though begrudgingly, to persuade business associates to ensure appropriate compliance reporting. This requirement will continue under the GST regime.

India Inc. is highly sceptical about the level of compliances that shall be required under the forthcoming GST regime. Given that the GST regime will require each and every transaction to be reported electronically on the common web-portal of the government (GST Network), the economic cost in creating suitable infrastructure for undertaking compliances could increase substantially. However, facilities like GST Suvidha Providers and GST Tax Return Preparers may mitigate this problem to a certain extent. Overall, given the magnitude of compliances under GST, the data interlinkages between different players in the value-chain will require greater focus.

Taking a cue from the recent developments in this area, it seems that there will be significant compliance reporting requirements in the near future. Tax compliance is set to become, if it is not already, a critical business function for businesses. The socio-economic measures adopted by the government to make India a less-cash economy implies the requirement of a broader compliance and reporting framework.

The government is working towards making compliances simpler. For instance, the procedures for obtaining a Permanent Account Number (PAN) or a service tax registration has been considerably simplified. The Income- Tax Return utilities provide a pre-fill option where master data from earlier years can be filled at the click of a button. Certain archaic forms under the indirect tax laws are also being omitted.

A significant section of taxpayers do not undertake tax compliances, either due to genuine ignorance of the law or because they did not seek professional advice at the appropriate time. The level of tax compliance, particularly by the unorganised sector is also quite low. In certain cases, tax compliances are undertaken out of business persuasions or extraneous factors, such as securing bank loans or obtaining a passport, instead of its actual purpose. The government is focusing its efforts on bringing this section of the economy within the tax net.

Though the objective of the government to simplify compliance is clear, the initiative is more towards undertaking compliances electronically. Hence, although adhering to compliance needs may become simpler, the economic cost of undertaking compliances will definitely be substantial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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