Riddle Warrants Tech Adoption, Culture of Tax Compliance
KOZHIKODE: Kerala’s paradox of higher tax rates but dwindling tax revenue appears to be more of a chicken and egg situation. Economic experts point out two reasons for the phenomenon. One, the state’s dubious distinction of massive tax evasion which always forces the government to keep the tax rates on the higher side.
The second: Archaic mode of functioning of the Commercial Taxes Department while the traders and industrialists are using advanced software that enable them to cover up the dodgings.
“As per the latest report of National Sample Survey Organisation, Kerala ranks first when the per capita consumer expenditure and the per capita VAT are considered. However, the state is at the eighth spot when taking into account the per capita VAT as a percentage of per capita consumer expenditure. This is clear evidence to prove that there exists massive tax evasion,” said Jose Sebastian, Associate Professor with the Gulati Institute of Finance and Taxation (GIFT).
“Frankly speaking, the tax situation in Kerala is caught in a vicious circle,” Jose Sebastian said. He highlights a scenario in which a 10 percent tax is imposed on a business with turn over of `1 lakh.
“When the businessmen report only a turnover of `50,000, the government will get only half the expected income. Hence, the authorities are forced to fix the rate at 20 percent. In fact, though the tax rates are higher, the government is not getting the actual benefits; the only exemptions being liquor and fuel,” he added. Consequently, the tax structure gets complicated and tax evasion becomes an attractive option. “Even a honest trader will also have to resort to evasion to remain in the competitive market,” he said. More significantly, majority of the traders are passing the benefits of tax evasion to consumers to survive in the extremely competitive market.
“The situation could change only when the traders would realise that they were playing a losing game. Evading taxes would only benefit an individual consumer. When the whole trading community indulges in this malpractice, there occurs a dip in revenue to the government thereby affecting its overall spending. Ultimately, traders will suffer,” he said. However, All-Kerala Consumer Goods Distributors Association president C E Chakkunny said tax evasion would automatically come down if the government reduces the rates.
“The government has recently hiked tax for registering luxury cars in the state. As a result, there will be a decline in registration of cars here. There is no point in the government hiking the rates and harassing the traders. What’s required is an effective mechanism to plug the loopholes and collect taxes,” he said. Theoretically, Jose Sebastian said, tax collection will increase if the rates are lowered.
However, traders of Kerala have become a strong force that they have been resisting any kind of corrective mechanism. The government is forced to hike the taxes as evasion prevails even when the rates are on the lower side,” he said. Total restructuring of tax collection mechanism incorporating latest technological advancements and creation of a voluntary tax payment culture are the need of the hour.
“To achieve this, the government should empower institutions like GIFT to create civic consciousness about paying taxes properly and encourage voluntary tax compliance,” Sebastian pointed out.