It has never been easy for any government to make its tax payers comply with the requirement of the system. Governments in today’s world have to cope with increasing expenditure and less revenue which in turn leads to financial and fiscal constraints. Raising the tax slab remains the only available function which serves as the primary means for serving public good along with proper maintenance of law and order, and also public infrastructure.
The primary purpose of taxation would be to benefit them rather than punish them. With the speed of change in laws it would be difficult for the companies to be in the proper place on tax filing and compliance procedures. There are also more positive ways of promoting tax compliance that are more consistent with the role of public spending as a net public benefit. But due to the uncertainties in the interpretation of tax laws, there has been a raise in tax evasion and disputes.
Tax Compliance- Meaning
It is the degree to which the taxpayer of the country follows or does not follow the taxation rules of the country. For e.g. paying the tax on time, filing returns properly etc. A wider definition of tax compliance, tax compliance should be defined as taxpayers’ ability and willingness to comply with tax laws which are determined by ethics, legal environment and other situational factors at a particular time and place.
The degree of non-responsiveness can be measured on the basis of the existing “Tax Gap.” The residue obtained will be the difference between the amount collected and amount supposed to be collected. Tax laws cannot always be precise. There are practical difficulties which have to be dealt with despite there being legal solutions.
Tax evasion issues may be important with respect to tax compliance. Tax evasion happens when the firms, trusts avoid the payment of tax by any illegal means.
Reason or Low Tax Compliance in India
There are many reasons for non-compliance with taxation laws in India. The following are some of the important reasons.
- It is not properly collected by the local government. It is often found to be unpopular and not perfect.
- There is no belief in Corporate Business by the people. They often think they are dishonest and accumulate profits at their cost. The Corporate Business must be made transparent enough to make the people believe.
- The employees are not secured enough in their job. Expecting them to comply with the Tax rate in this situation is difficult.
- The businesses in the informal sector are not made self dependent.
The Union Budget in 2018 introduced long term capital gains and tax breaks for all those senior citizens who earn their income from fixed deposits. One reform which remains unreported till today is the measures related to compliance.
The Union Budget 2020 has taken various steps to put an end to the tax evasion and begin 100 percent tax compliance.
- The Finance Minister has reduced the NRIs would be allowed to stay in the Country. NRI who stay in India beyond 120 days will be made liable to pay tax. Since there are many who hide their taxable income abroad.
- It has also explicitly stated that even if the taxpayer is an NRI, but earns any amount as Income in India, he will be made liable to pay tax for the income he received in India.
- Section 44AB of the Income Tax Act, 1961 mandates a compulsory tax audit by a Chartered Accountant for those businesses whose total sales, turnover or gross receipts, if exceeds one crore rupees and in the case of professionals, whose gross receipt exceeds fifty lakh rupees in any previous year.
- To reduce the burden of small and medium enterprises, there has been an increase in the current threshold limit for business from one crore rupees to five crore rupees.
- Section 115A (5) of the Income Tax Act, 1961 exempts ‘Return’ which is actually required to be filed under Section 139(1) subject to certain conditions such as if his total income consists only such dividend and interest income and if requisite tax has been deducted at source.
- To make the process more effective, it proposed all the taxpayers to file the “Tax Audit Report” one month prior to the last date of filing.
- ‘Compliance or Return Filing’ relief to non-residents whose total income consists royalty or fees for technical services subject to requisite tax has been deducted at source, by amending section 115A of the Act with prospective effect from 1st April, 2020 to apply from the assessment year 2020-21 onwards.
In India, the tax year begins by the 1st of April till 31st of March. For verifying whether the taxpayer has complied with the laws of the land and pays his tax and files his returns on time, it is done electronically by the tax authorities. Indirect tax compliance is done by self assessment and the payer will be supervised, if the Deputy Commissioner of the IT department feels that the taxpayer has suppressed any transaction.
Non- Compliance as per Income Tax Act 1961
In the case of under reporting or misreporting, the taxpayers may impose a penalty. Misreporting is a case where there has been a concealment of the actual income. Under reporting is the case where the Income Tax Authorities find out the person’s income to be more than what he claims.
Penalty may also be imposed in the case of non deduction and non payment by the taxpayer. They may be made to pay penalty in case of non-filing of reports or returns, non-appearance on issuance of summons or not responding to the notices issued.
The GST laws provide for imposition of penalties in case of non-payment of tax, or short payment, or erroneous refund, or wrongful availment or utilisation of input tax credit.
As per Section 44AA of the Income Tax Act, in case if the person or the company fails to maintain their account properly, a penalty of Rs.25000 may be levied.
As per Section 140 A (1) of Income Tax Act, if the taxpayer fails to pay either wholly or partly self-assessment tax or interest then the tax payer will be treated as a defaulter. As per Section 221(1), a defaulter may be charged with penalty by the assessing officer.
As per Section 27(1) of the Income Tax Act, penalty is also imposed for not providing correct details of one’s income.
How to Increase Tax Compliance?
· ‘Quick wins’
There should be proper quick win initiatives implemented to achieve significant revenue impact.
· Focus resources on improved auditing, processes, and tools
Fast growth might discourage tax evasion. And effective auditing, attempts to penalize evasion.
· Ensure regular updates to the taxpayer registry
Registration must be made effective and should be done in a rigorous manner and a proper feedback system should be made available for the taxpayer to constantly update their information.
· Use electronic channels for simple transactions
It is a growing sector in many countries especially in a country like India. Introduction of the payment system through electronic form has become helpful and being widely followed. It should be made compulsory to pay tax through electronic form. This would help the IT department keep a proper track on the tax collected.
· Create external checks that enforce compliance
There should be proper checks on the registry now and then, it would be more effective if the registry is verified when a citizen of the country imports goods, or sends funds abroad, apply for public contracts etc. It ensures compliance and also instils a fear among the citizens to think of it before committing a mistake.
Tax Compliance is a difficult subject with deeper problems. Tax compliance is solely based on tax knowledge and the probability of being audited, and on the perception of the tax rate. The taxpayer and tax authority should be cooperating and pursuing together to attain their goals. Tax knowledge and Tax Compliance is said to have a direct relationship. Tax compliance and level of knowledge varies among the people. When a taxpayer has better tax knowledge, attitudes towards tax would be positive and this will in turn increase compliance and reduce the propensity to evade taxes. Self assessment systems should be widely followed and accepted in both indirect and direct tax, in order to increase voluntary taxation.
“Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.”Arthur Vanderbilt
- What are the possible ways to ensure effective tax compliance?
- What does the Income Tax Act of 1961, say about non- compliance with the law
- Explain the meaning of the word “Tax Compliance”
- What are the reasons for low tax compliance in India?