Developing countries have much to gain from boosting tax morale to fund their tax collections and thereby improving their economic status
The total number of tax-paying citizens in India continues to be low. About 5.65 crore income tax returns were filed by August 31, 2019, the due date for filing of ITR (income tax returns) for FY 2018-19. Even fewer, roughly 60 per cent, of these tax filers paid income tax. Our GST collections have been lacklustre too, hitting the below 1lakh crore mark lately. What influences us when we think about taxes and what is the reason behind our sub-par tax compliance? Let’s analyse this further.
Judging tax morale
The OECD (Organisation for Economic Co-operation and Development) recently released a report on the ‘tax morale’ of individuals and businesses. This report studies how ‘tax morale’ is influenced by a wide range of socio-economic factors and can vary according to culture and populations. Tax morale refers to the willingness to pay taxes voluntarily. It is not just the rate of taxation or the threat of onerous enforcement that influences tax morale, but age, gender and education levels have a bearing on how willing people are to pay taxes. In fact, the report says that religiosity of taxpayers also has a bearing on tax morale.
Understanding tax morale is essential, especially for developing countries, as they usually suffer from typical problems such as poor governance, low per capita income, the desire to evade taxes and the widening rich versus poor gap. These countries have much to gain from boosting the tax morale to fund their tax collections and thereby improving their economic status.
The report says that older individuals, or those who are more educated or are more religious (god-fearing) have a higher tax morale when compared to others. Women also have a higher tax morale than men. This behaviour of individual taxpayers is also reflected in small enterprises. Larger enterprises have a more complex tax morale that mostly depends on ‘tax certainty’. When there is poor tax certainty, enterprises may be less motivated to contribute to taxes or to comply.
Focus on taxpayer education
To positively impact tax morale, the government must focus on taxpayer education programs, starting from schools and encouraging students to understand the role taxes play in the economy. Amnesty programs must be thoroughly reviewed for impact; do the rich feel motivated enough to come out with disclosures about their wealth and pay tax on it? Also, do citizens trust their government? Trust is a complex term in the context of government and every citizen may have his or her own perception of trust. However, delivery of public services, starting with basics such as roads, electricity, and safety, may encourage tax morale positively.
Businesses are prone to looking at creative ways for avoiding the payment of taxes. Their relationship with tax morale is more complex, since they are primarily driven by a desire to grow shareholders’ wealth. The report states that tax uncertainty affects business decisions that are related to size, location and structure of investment. Tax uncertainty is dependent upon various factors.
The uncertainty around getting withholding tax relief or claiming input credit or getting refunds, lack of clarity in the law, unpredictable tax authorities, bureaucracy in complying with legislation, lengthy court procedures, lack of expertise of tax officials and poor understanding of international business and taxes, all lead to uncertainty. To boost the tax morale, the government must look at streamlining dispute resolution, provide certain and cohesive understanding and interpretation of the laws, take a more predictable approach and offer co-operative compliance.
This report is an interesting analysis of what influences people to pay taxes. And what governments can do about it. It is especially relevant in the Indian context. The government has been actively engaging with taxpayers lately. Certificates to those who contribute taxes, incentives for dutiful citizens are also being worked upon. Recently, the government proposed an overhaul of the income tax assessment procedures. The government has also been working on improving the capabilities of e-filing. However, these actions, though positive, may need to be supported by more constructive efforts. After all, the most common grudge taxpayers have is – where do our taxes go?(The writer is founder and CEO, ClearTax)Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.