JULY 30, 2019

By Dr G Gokul Kishore

PSYCHOLOGY and taxation hardly go together in terms of establishing direct causal relationship of compliance behaviour of taxpayers. However, research in the past has attempted to understand taxpayer's psyche and behaviour to design appropriate tax policy and law. In GST, such attempt has commenced at an early stage. This 48th part is an attempt to understand such attempt by the tax administration and to suggest measures to nudge this process forward.

Nudge theory - From report to returns

Economic Survey 2018-19 (Vol. 1 - Chapter 2) is titled 'Policy for Homo Sapiens, Not Homo Economicus: Leveraging the Behavioural Economics of Nudge' . It talks about specific government programmes which have used certain inputs from behavioural economics to 'nudge' people towards desirable behaviour. Nudge means a light touch or a gentle push. According to this report, nudge policies lie between laissez faire and incentives. The spectrum is laissez faire - nudge - incentives - mandate (coercion). Nudge policies gently steer people towards desirable behaviour even while preserving their liberty to choose. The Survey makes a mention of setting up of dedicated units to use behavioural insights by UK, US and Australia. To improve tax compliance, the report calls for modifying social norm from "evading taxes is acceptable" to "paying taxes is honourable" by employing behavioural insights. Perception about quid pro quo on receiving services proportionate to taxes paid is also discussed. Interesting suggestions made in this report include naming roads, trains, important buildings, schools, etc., with the name of highest taxpayers. The suggestions include recognizing honest taxpayers by conferring certain privileges like expedited boarding in airports, etc.

In terms of specifics, the report lists certain principles and application of the same. Leveraging default rules is suggested but the methods of implementation are related to direct taxes. Let us try to build on the same for GST. Reduction in late fee for filing returns late or waiver of late fee in certain situations has helped in arresting the slide in the number of non-filers. This should be made part of the CGST Act / Rules so that situations are specified which will provide for reduction, if not waiver, of late fee for filing returns after delay. While GST returns are mandatory even if NIL supplies are made during a particular reporting period, it may be prudent to implement different cycle of frequency if NIL returns are to be filed for more than two or three tax periods.

Implementing compliance rating

It may be relevant to recall one of the most publicized provisions of GST law in the initial period. Section 149 of CGST Act provides for compliance rating based on record of compliance with the statutory provisions. The compliance rating score is to be determined based on certain prescribed parameters. It shall be updated periodically and placed in public domain. As the teething troubles relating to GST portal and return filing are settling down, it is time to give a serious thought to implementation of this provision. It is being projected that evasion in GST regime is on the rise. An analysis of compliances and ratings given by the system may provide sufficient pointers to the government as well on the trend of revenue leakage. The initial discussions centered around suggestions like taxpayers having poor compliance score will be barred from using certain facilities as provided in law. Nudge theory can be employed in such situation as placing the score in public domain itself will act as a deterrent or stigma and will discourage non-compliance to some extent. However, care should be taken not to equate such rating with outright tax evasion for which separate press releases are issued by revenue intelligence bodies. Public shaming is not the objective in compliance rating rather pushing those on the edges of occasional delinquency to total compliance is the idea behind such provisions.

Improving compliance climate by CBMs

When the cold war era was at its peak, CBM was the abbreviation used along with missiles. These days, Confidence Building Measures form the key whether it is international relations or tax administration. Issuance of pro-active and trade-friendly clarifications, timely and corruption-free sanction of refunds, non-invocation of extreme powers like detention and seizure for mistakes in documents, engaging with trade though local committees (like RAC in Excise regime), issuance of Section 37B type orders guiding and binding field formations and a host of such measures can go a long way in improving the compliance climate. Though not mentioned in any official document, these are the micro-measures on the ground which will nudge taxpayers to comply more effectively. Rent-seeking culture still pervades sanction of refund in certain cases. The image of the department that it continues to be corrupt despite GST being 'everything is online' regime, should be addressed through such and similar measures.

Last year, it was reported that CBIC has constituted Nudge Team to devise strategy to study behavioural patterns of taxpayers and use segmented approach to encourage tax payment. The department will segregate taxpayers into various categories like 'disengaged', 'resisters', 'triers' and 'supporters'. The idea is to softly tell by e-mails non-wilful defaulters to pay the tax dues. One of the provisions which may require publicity and possible amendment is Section 80 of CGST Act. This provision empowers the Commissioner to allow payment of tax and other dues in instalments. But this is applicable only when show cause notice has already been issued and demand has been created. This provision should be amended to include voluntary payments also even in the absence of any notice. Anyway, interest will be required to be paid on such dues even if they are allowed to be paid in instalments. This calls for revisiting provisions in CGST Act which can give impetus to encourage voluntary compliance even in case of defaults.

One of the traditional dilemmas faced by tax administration is to deal with economic offences as well as occasional and non-wilful defaults and inadvertent mistakes. The approach in treating both these categories tends to become common. Genuine mistakes are then visited with disproportionately severe penalties. This trend has over the passage of time contributed to an adversarial climate and negative perception shared mutually by both the tax department and the taxpayers. The progressive tax reform of GST will be progressive in real sense of the term if GST Council approves and CBIC implements appropriate nudge policies with adequate statutory backing to improve compliance.

[…To be continued]

[The author is an Advocate. Views expressed are strictly personal.]

See Part 47.