Only two per cent of India’s population pays tax. While data from the income tax department shows that the number of taxpayers in the salaried and non-salaried categories is the same, the percentage of non-salaried paying taxes, is lower. Of this, the biggest gap would be with professionals such as doctors, Chartered Accountants, lawyers and owners of local businesses. Taxpayers often feel short-changed when they see businessmen having houses that cost a fortune and lavish lifestyles, but not paying tax.
The problem is systemic – the previous generations of families avoided paying tax due to unfavourable tax rates. The tax rate in the 1970s was over 50 per cent, resulting in people avoiding paying tax. This has been passed over generations and has become a way of life. Hence, even if the government were to bring the tax rate down to five per cent, more people are not going to pay tax.
A major concern that citizens have is how taxpayers’ money is spent. It seems like the money collected goes into a black box with no clarity on how it is being used. Most urban taxpayers like myself believe that our tax money is used to fund politicians’ freebies such as educational junkets overseas and very little really goes towards urban infrastructure development or even reaches the poor through programs or schemes meant for them. Further, urban taxpayers believe it is a waste of money to pay tax, as the government will not do anything for them, because the government’s priorities lie in catering to the poor. Taxpayers also do not connect the benefit of paying taxes, as they do not really get anything in return. For example, taxpayers need to fend for themselves in retirement for healthcare costs in the absence of a health welfare scheme. Hence, the feeling is that tax is being paid to help someone else get benefits, without any benefits accruing to the taxpayer.
Another grouse taxpayers have is that other than the salaried, professionals such as doctors and lawyers or even local establishments such as the neighbourhood supermarkets or bakeries do not pay tax or pay very little tax, even though they have a flourishing business. It seems to be easy to evade tax for such people, whereas existing taxpayers are troubled with tax scrutiny.
In the recent budget, the government has taken some steps to get more people in the tax net but a lot more needs to be done.
Where tax money needs to go
As a taxpayer, I would like to see the tax paid by me to be used for local infrastructure development, among other things. Hence, it is important for the government show to taxpayers, especially at a regional/local level, as to how their money has been utilized. First, this will make existing taxpayers happy and, second, showcasing the use of funds for the benefit of citizens at a local level, the government can exhort more people to pay tax. Unless citizens see roads and other facilities improved, they are unlikely to willingly pay tax.
Second, good tax behaviour needs to be showcased, not in the form of inviting top taxpayers for tea with the prime minister, but with advertisements that citizens can relate to. A person who earns Rs 10 lakhs in not going to be enthused to pay tax just because he hears of an industrialist or film star paying a large amount of tax. He needs to hear about how others like him can make a difference if they pay tax.
Third, children need to be taught that paying tax is our national duty. I have always been a votary of financial literacy at school and college and this would certainly help ingrain into the younger generation, the need to pay tax.
Fourth, people are able to evade taxes due to corruption arising from discretionary powers, which income tax officials have. Just like penalties on late tax filing etc., there needs to be standardization of rules with respect to tax evasion or under-reporting of income.
Five, financial crime is still not seriously feared and the government will need to impose stringent penalties and have quick resolution of cases like the IRS or SEC in the US, to ensure citizens pay their taxes correctly.(The writer is a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra)