Enhancing Tax Authority Accountability: Legislative Panels as Watchdogs

T K Arun

BENJAMIN Franklin is supposed to have said that the only certain things in life are death and taxes. The certainty of taxes can be exaggerated, especially in India. But there is nothing uncertain about the fury of a taxman who has been scorned.

Being at the receiving end of arbitrary demands by taxmen is one of the banes of life as a small entrepreneur in India. You either pay up or litigate your way to death and leave behind an inheritance of incomplete litigation. This must change if India is to reap its demographic dividend and unleash the creativity of its vast cohorts of talented youth. An immediate solution would be to make the investigative arms of tax authorities accountable to committees of the legislature at the appropriate level of the federal polity — a committee of the state legislature for the state tax authorities, and a committee of Parliament for the Central tax authorities.

The Goods and Services Tax regime was supposed to herald an era of transparent tax compliance and administration, especially as India’s system of value added taxation is completely online, a first for the world. Fraud would be minimal, it was believed, and evasion difficult. But daily news is rife with reports of the government busting fake claims of input tax credit and saving the exchequer tens of thousands of crore of rupees.

Recently, the government changed its rules for implementing the Prevention of Money Laundering Act, to add the GST Network (GSTN) to the list of agencies with which the Financial Intelligence Unit (FIU) in the finance ministry would share information. The actual notification was about a one-way sharing of information by the FIU to the GSTN, to inform the latter of any suspicious foreign exchange transactions. But the business community understood the move to mean that the GSTN was being brought under the Prevention of Money Laundering Act, especially as sections of the financial media reported the move as such.

The ecosystem of tax administration in the country is such that taxpayers are ready to expect the worst. And the government does not disappoint.

Take the case of the recent huffing and puffing over including or excluding credit card payments from the limits of foreign exchange an Indian citizen can spend annually under the liberalised foreign remittance scheme, which allows an Indian to take as much as $2,50,000 abroad a year; or asking for tax to be deducted at source on credit card spends abroad. These instances show the government’s penchant for deploying brute, punitive force where a delicate, precision stroke is all that is called for.

Conceptually, what difference does it make if a citizen spends foreign exchange as currency, traveller’s cheque, prepaid card, bank account transfer, credit card, debit card or Gift-from-Santa Claus card? In whatever form the transaction is carried out, it places an equivalent claim on the total foreign exchange resources available within the country. In theory, there is no reason to exempt any element of outflow of foreign exchange, carried out by whatever instrument, from the overall limit under the liberalised remittance scheme.

The demand for Tax Collected at Source (TCS) on credit cards is even more arbitrary. TCS is resorted to in order to register a marker of a transaction, and the tax paid can be recovered, if warranted, while claiming refunds at year-end filing of income tax returns. But why ask all citizens to go through this process that costs money and effort? Every credit card is linked to a bank account, and every bank account, to a Permanent Account Number of the Income Tax Department.

Every transaction involving foreign exchange, made using a credit card, should stack up against the relevant PAN, and, at the end of the year, if the PAN-holding entity has not filed income tax returns showing income that can sustain the kind of foreign exchange spending via credit card or other means, the taxman should pay him a visit. But why should people who have only tax-paid income, especially the salaried class, lock up a part of their foreign travel budget as advance, refundable tax payment, to spare the tax authorities the effort of matching every PAN with its associated income and spending, particularly in foreign exchange?

It is better that 10 guilty persons escape rather than one innocent suffers — that is Blackstone’s ratio, from William Blackstone’s acclaimed Commentaries on the Laws of England. What chance does an 18th-century jurist’s ethical reasoning have in today’s India, where you can determine innocence or culpability by looking at a person’s clothes and punishment is delivered with a bulldozer, even before the extent of liability is debated, leave alone ascertained?

If anyone imagines that the ordinary citizen is not affected by the Enforcement Directorate (ED) going after Opposition leaders in state after state, let them ponder the effect on the ED official who is endowed with impunity for carrying out his political master’s directive. Will he expect his political master to pull him up if he were to do a freelance operation of his own on the side? Can a corporate rival tempt this official to target your business for suspected illegal activities?

The legal system is the ultimate recourse for all violations of constitutional freedoms and denial of justice. But the wheels of justice grind ever so slowly as to be practically useless in the lives of ordinary mortals.

An immediate solution is to make the arms of the tax department that interact with the public, by way of making visits to company premises or inspections and raising additional tax demands, accountable to a committee of the legislature. It is not enough for the political executive, which controls all arms of the state, including the tax departments, accountable to the people via the legislature. Assembly sessions are disrupted or not held. But committee meetings can be held even between Assembly sessions.

India’s prosperity depends on a political culture of accountability.

The article was first published in The Tribune as Make taxmen accountable to legislative panels on July 20, 2023.

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