Amid the growing chorus against black money and the government’s efforts to pull the plug, Union Law Minster M Veerappa Moily has suggested Finance Minister Pranab Mukherjee to completely overhaul the tax administration. In a letter to Mukherjee, Moily said the two wings for tax collections in the country — Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) — should be merged for tackling black money effectively.
Moily says such a merger of the direct and indirect tax departments would lead to better information dissemination, co-ordinated effort and a professional approach in handling tax evasion, which leads to creation of unaccounted income and black money.
“For tackling black money, this is a very important measure,” Moily told Business Standard, adding, “Why should you create bureaucracy unnecessarily when you have to do it professionally”.
The law minister’s prescription for major revamp of the tax administration for curbing black money is based on the United Kingdom (UK) experience.
The consolidation of tax departments happened in the UK in 2006, where direct and indirect tax departments were merged into Her Majesty’s Revenue and Customs (HMRC). Many of the European Union (EU), Latin American and Asian countries have also merged their departments.
Although the law minister is yet to get a response from the finance minister, the proposal has already started creating ripples in the finance ministry.
A senior finance ministry official said that merger of CBEC and CBDT might lead to abolition of the revenue secretary’s post as his job was to co-ordinate between the two wings.
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In his letter Moily has highlighted that the advantages of consolidation of tax department into one entity would be manifold. It has been stressed that a unified department to cover both direct and indirect taxes would provide enormous information advantages on a single business across various taxes that they pay. This would make tax administration more information based as cross-information is not available when two departments are separate.
Another enumerated benefit of the step would be knowledge across taxes in the department, ensuring that it spoke in one voice with the stakeholders (Industry) and customers (Income Tax Payers).
Another recommendation is to remove the word ‘tax payer’ from the tax terminology and replace it by ‘stakeholder’ in case of businesses and ‘customer’ for the individual to bring it closer to the international context. This would impart a reality that the tax department should be transparent and needs full co-operation from a taxpayer so that he is enabled to pay due tax rather than having to be pursued to pay tax.
The merger of the departments into one is expected to lead to efficient methods to reduce tax evasion because of the available cross-information. Moily has prescribed that it was no longer essential to have revenue maximisation as a goal for the tax administration department — What needed to be maximised was minimisation of the tax gap – potential minus actual tax collection.
In the UK, this has been termed a Departmental Strategic Objective (DSO), which is reported to Parliament on a regular basis. The tax department is asked how much is the tax gap or leakage, why it has gone up or down, and Parliament regularly reviews those results.
In case of individual tax payers, the law minster has suggested that all taxpayers need not be asked to file tax returns as in the UK model. If the income sources are only wages and salaries and interest, then tax could simply be deducted by employers and banks. If the tax payer wants a refund, he/she can file for refund.
This would leave the tax administration to focus on more complex individuals who have higher source of income. In order to have full information on them, tax administration needs to build up a profile of income sources of such individuals by developing a software. A third-party information system could be useful in this. The Annual Information Return (AIR) having details of high-value transactions in India is still in the nascent stage and has not kept pace with the global practices or advances.