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Inflation Reduction Act of America: Lessons for Indian Tax Administration!

THE POLICY LAB-31
OCTOBER 02, 2023


By J B Mohapatra

IF it was as easy to manoeuvre and obtain a unanimous support for bringing fundamental reforms in tax administration at organizational, management and budget levels in order that the tax administration satisfies the demand for higher revenues to spur economic growth and augment quality of delivery of public service, USA's experiences while passing the Inflation Reduction Act, 2022 (IRA 2022) shows to the world that the task always has remained onerous. IRA 2022 intended to create no new taxes, barring (a) 15% corporate minimum taxes for companies with higher than a USD 1 billion revenues (b) an additional 1% excise tax on stock buy-backs and (c) a 2 year extension of the limitation on excess business loss, and simultaneously provided an additional funding support to the IRS to engage more effectively in tasks they were supposed to be discharging: in business support modernization, taxpayer services, enforcement of tax laws and operations support. Opposition in the Senate/House came in form of legislative bills titled in sample cases such as (a) IRS Funding Accountability Act (HR 9341): to delay IRS funding for enforcement activities till such time IRS submits a new revised spending plan (b) Simplify, Don't Amplify the IRS Act (Bill No 7485): To limit IRS enforcement authority and modify IRS reporting requirement. Opposition also came packaged in such comments: "The Democrats are weaponizing the most feared agency in all of the federal government: the IRS", and "Does anyone believe the IRS would not go after the middle America?"

IRA 2022 no doubt made way for the largest single infusion of funds (USD 80 billion) in the agency's history to transform the agency into a digital first tax agency clearly focused on customer service and preventing revenue leakages principally within the swathe of wealthy and super wealthy, and its detailed work plan include (a) replacing older technology and introduction of efficient systems that allow taxpayers enhanced access to their financial information (b) easier communication with tax agency (c) an efficient system to correct errors in returns and intimations (d) introduction of data analytics and machine learning for correct characterization of high value transactions and tax arrangement schemes (e) bolstering number of revenue agents and tax attorneys to face up to complicated business partnerships and corporations (f) collection of owed taxes (g) improve upon existing levels of legal and litigation support to the agency (h) improve upon digital asset monitoring and compliance activities, and (i) meaningfully enforce criminal statutes related to violation of internal revenue service laws and other financial crimes.

Efforts to modernize the tax system on a consistent basis to address the compliance gap between the actual and the potential tax revenues has been undertaken across jurisdictions, not just in USA, but from jurisdictions in market economy to emerging and in transitioning countries too. These efforts principally through legislations and rules to steer majority of citizens to a culture of voluntary compliance, and in some measure a complementary enforcement architecture to address compliance issues for deterrence and prevention of impunity, have largely bore dividends, as for example, India's direct tax collection numbers indicate in the last 15 years:

FY

Direct Tax Collection in Cr

FY

Direct Tax Collection in Cr

FY

Direct Tax Collection in Cr

2008-09

3,38,818

2013-14

6,38,596

2018-19

11,37,718

2009-10

3,78,063

2014-15

6,95,792

2019-20

10,50,681

2010-11

4,45,995

2015-16

7,41,945

2020-21

9,47,176

2011-12

4,93,987

2016-17

8,49,713

2021-22

14,12,422

2012-13

5,58,989

2017-18

10,02,738

2022-23

16,61,000

Contrasted to collections, as per Union Budget figures since 2008-09, the expenditure incurred on direct tax administration through its regions, charges and directorates on its activities towards inspection, scrutiny, processing, research, statistics etc laid out under salary and non-salary including project expenses over large information technology projects such as e-filing or e-TDS initiatives have been frugal and therefore adduced more often as an achievement:

FY

Expenditure on Direct Tax administration/ % of Direct Tax Collection (In Cr and %)

FY

Expenditure on Direct Tax administration/ % of Direct Tax Collection (In Cr and %)

FY

Expenditure on Direct Tax administration/ % of Direct Tax Collection (In Cr and %)

2008-09

2,248/ 0.67%

2013-14

3,641/0.57%

2018-19

7,074/0.62%

2009-10

2,726/ 0.72%

2014-15

4,101/0.59%

2019-20

6,952/0.66%

2010-11

2,698/0.60%

2015-16

4,593/0.61%

2020-21

7,223/0.76%

2011-12

2,976/0.60%

2016-17

5,578/0.66%

2021-22

7,479/0.53%

2012-13

3,283/0.59%

2017-18

6,087/0.61%

2022-23

 

Growth in absolute numbers over the last 15- year period at a CAGR in excess of 11% impressive as they are, many would hold the bareboned growth parameter as an unsophisticated tool of measurement of a tax administration's overall effectiveness. In that line of argument, and at the macro level, 2 data points relating to India's tax collections are more sobering: one is the tax arrears, and the other is the % contribution of regular tax in the overall collection. Below the 3 -year figure of tax arrears up to FY 21-22:

FY

Tax Arrears in Lakh Cr

2019-20

16.18

20-21

15.11

21-22

18.66

While much of the demand classified as arrears would have been under pending write off, or taxpayer not traceable, or no asset cases, or under protective demand, or demand linked with applications with NCLT or ITSC, or stay-granted, a nation-wide comprehensive analysis of these demands (size of arrears now equaling a full year's average direct tax collection) at the level of system and processes and regulations should be in order.

As regards contribution of regular tax to the overall collection (those tax not being advance tax or TDS or self-assessment tax, and raised solely on the efforts of authorities while making inquiries or after undertaking investigations), the picture for the last 15 years is below:

FY

Regular tax collection (in Cr) / % of regular tax to the total collection for the year

FY

Regular tax collection (in Cr) / % of regular tax to the total collection for the year

FY

Regular tax collection (in Cr) / % of regular tax to the total collection for the year

2008-09

21,337/6.3%

2013-14

72,528/11.35%

2018-19

1,03,774/9.12%

2009-10

33,274/8.8%

2014-15

80,189/11.52%

2019-20

67,620/6.43%

2010-11

51,838/11.62%

2015-16

63,814/8.60%

2020-21

42,297/ 4.46%

2011-12

51,512/10.42%

2016-17

74,138/8.72%

2021-22

60,829/4.3%

2012-13

62,418/11.16%

2017-18

98,785/9.85%

2022-23

 

None should quibble if one were to say that voluntary tax in the nature of advance tax, self-assessment tax or TDS is a function of good legislation, and that regular tax is a function of both good legislation and its successful administration in actual field conditions. In that context, reduction in % of contribution of regular tax to overall tax collection should be acknowledged as a stress point in tax administration and should be raising valid issues of effective enforcement, inter-se priority of regular tax in the department's focus areas, and many other tangled issues of tax administration including the strength of tax officials qua the number of taxpayers and what should be the ideal proportion

It should be admitted that the Income Tax department is catering to demands of a much larger taxpayer base of 7.78 Cr in 2022-23 than it was in 2015, when the taxpayer base was 4.04 Cr. Equally true is the fact that tax legislations and systems and processes allied to the legislations have become more complex on perfectly justified reasons of equally complex and innovative practices and structures in business and profession, and rapid changes and modifications in rules and regulations in allied laws on which the edifice of tax law is often founded.

Broadening the revenue base for an equitable tax regime, and striking a better balance of enforcement with taxpayer service needs and infrastructure modernization invariably should require an expansion of the cadre ( sanctioned posts of 4,920 at the level of Assistant Commissioners and above and 5,942 at the level of ITO, since 2015), building up the capacity of the cadre to effectively tackle the tax sectors, as also infusion of technology and training, so that the department does not find itself overwhelmed either in tackling with the number of inquiry/investigation cases or in facing up to the complexity in business structures and practices. While arrears of tax and % contribution of regular tax to net collection are just the two indicators for a need to augment department's taxpayer service and enforcement resources, there could be innumerable other imperatives for bolstering department's capacity and its modernization. Whether these improvement projects, if they come packaged within a central legislation like the USA did with IRA 2022 or in any other form, these efforts should meaningfully connect tax reform to quality of delivery of governance objectives.


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