“When lots of people don’t pay tax or find ways not to pay tax, the burden comes on those who pay their taxes honestly. I want every Indian to introspect – do you accept this situation?" said Narendra Modi earlier this month. The Prime Minister’s appeal is a consequence of India’s slowing tax collections. In recent years, partly because of economic slowdown and partly because of changes to the tax system, India has struggled to raise taxes -- and this has severely constrained the government’s ability to reignite the economy.
India’s tax-to-GDP ratio, the universal measure for a state’s revenue-raising ability, for centre and states combined was 17.1% in 2018-19, lower than the average of its emerging market peers (20.9%). Crucially, India is more reliant on indirect taxes (taxes on spending) instead of direct taxes (taxes on income) compared to its peers. Since direct taxes are taxed on income, they are more progressive and hurt the poor less. But the direct tax share in India's tax collections has shrunk as overall tax revenues have fallen. The central government’s gross tax revenues, as a share of GDP, declined for the second successive year in fiscal 2020, according to revised budget estimates. This was also the biggest shortfall from budget estimates in the last 18 years.
To address this, the government has announced a new amnesty scheme “Vivad se Vishwas" , seeking to dispose of nearly 480,000 cases, involving disputed tax amounts of ?9.32 trillion. But its impact is likely to be limited.
“Wherever people don’t have a very strong case, they would like to come forward and settle. But in genuine cases, where assessees typically have a higher chance of winning, people would not go for the amnesty scheme," said Amit Maheshwari, partner at Ashok Maheshwari and Associates, a tax consultancy firm. And statistics are not in favour of the government. According to a 2019 CAG audit report, an overwhelming majority of the cases in tribunals and courts are decided in favour of the assessees.“Also even if you settle for the pending cases, in future you may have the same issue being disputed by the tax authorities and again you may get into litigation. It is better to finish the litigation right now to set better precedence for next time", said Maheshwari.
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