Moral hazard | Business Standard Editorials

The government is reportedly planning to come up with an immunity scheme for direct tax assessees in the upcoming Budget. The scheme will allow them to declare any additional income in the past five-six years without facing penalty or prosecution. The idea has been proposed by the direct tax task force. The government expects that the scheme will help generate revenues of about Rs 50,000 crore in the first year of implementation, aside from improving compliance. The motivation for the government is not very difficult to understand. It is facing a significant shortfall in revenue collection in the current fiscal year and is likely to overshoot the fiscal deficit target of 3.3 per cent of gross domestic product. For instance, net of refunds, direct tax collection witnessed a growth rate of 0.7 per cent till December 15, compared with the target of 17.3 per cent. Given the state of the economy, managing government finances is likely to remain a formidable challenge even in the next fiscal year. Therefore, the government would welcome revenue inflow by any means. Besides, the government expects the scheme to help reduce litigation. About 500,000 cases are said to be pending at different levels with the disputed amount worth Rs 7-8 trillion.

However, such immunity schemes are better avoided for at least two strong reasons. First, it affects the firmness of tax laws and would discourage taxpayers from filing their dues accurately. What is the need to take tax laws seriously when the government comes up with some immunity or amnesty scheme at regular intervals? It is also unfair to honest taxpayers. The moral hazard comes from the negative impact it has on behaviour. For a tax evader, the thought that there will be a window of forgiveness in future is bound to encourage deviant behaviour. Second, the history of such schemes, starting from the 1950s, shows that they don’t yield the desired results, and it is highly unlikely that the government will get anything close to the quoted amount of Rs 50,000 crore in the first year of implementation. For instance, the ongoing Sabka Vishwas Scheme for legacy dispute resolution in the area of indirect taxes is said to have raised Rs 30,000-35,000 crore, against the estimates of about Rs 1.5 trillion, prompting the government to extend the deadline to January 15. Schemes for direct tax assessees, launched after the National Democratic Alliance government came to power, have also shown underwhelming results.

Therefore, instead of immunity and amnesty schemes, the government needs to work on two areas to improve its finances, and the Budget for 2020-21 will be a good starting point. First, the expenditure should be aligned with a realistic expectation of revenues. The government tends to overestimate revenues and underestimate expenditure, which creates a problem. Second, work on simplifying tax laws, along with rationalising rates, should be expedited. This will not only help increase compliance and revenues but will also reduce litigation. The government has done well to introduce faceless scrutiny of income tax cases. This will help check harassment and augment compliance. Further, the government needs to build capacity in the tax administration to be able to identify tax evaders. Regular use of immunity and other such schemes reflect capacity constraint and misallocation of resources in the tax administration.

via Moral hazard | Business Standard Editorials

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s