Expert Speak India Matters
Published on Jul 06, 2017
GSTN infrastructure has the ability to track every invoice and track indirect taxes and their possible evasion. Direct taxes databases, linked with Aadhaar, can follow or take leads from GSTN to multiply the system’s power to flag tax evasion and evaders.
GST will curb evasion of both, indirect and direct taxes

Because of the way the goods and services tax (GST) has been conceived and structured, most loopholes of evasion in indirect taxes have been plugged. In fact, the GST is the first instrument that will curb evasion of both, direct and indirect taxes. In other words, the GST system has made it easier for the tax administration to 'follow the money'.

Although there may not be any visible direct relationship between indirect and direct taxes, the linkage provided by the digital infrastructure, on which both these taxes now rest, brings transparency that will highlight every invoice, every transaction, every rupee moved. Because of the incentive to be on the GST Network (GSTN) in order to claim input credits, the money that was evaded through indirect taxes will not be able to hide anymore. The trails of transactions, tracked by GSTN, will definitely find the taxes evaded. Simultaneously, the digital trail of taxes evaded on GST into the pockets of individuals or institutions will be tracked through the instruments of PAN (Permanent Account Number) and/or Aadhaar and its linkages to the banking sector. Beginning with large evasions, the trickle down of this digitally-linked trail will see a reduction in direct taxes evasion, that is, evasion that gets created in the system of indirect taxes and expresses itself through direct spending of individuals.

On the financial front, it has already become increasingly difficult to deal in unaccounted-for cash — remember, the cash economy that is accounted-for, say the agrarian economy at the farm level or small vendors in cities, is not an evasion economy. Like the GST, which has brought all indirect taxes under a single system over 17 years — from the first GST panel set up under the watch of Atal Bihari Vajpayee in 2000, through attempts made by Manmohan Singh that saw the lapsing of their bill in 2014, to its resurrection, clearance in Parliament and launch by Narendra Modi on 1 July 2017 — direct taxes reform too has been a work in progress, across successive governments. While the GST system will stabilise over the next 12 months and create new indirect taxpayers through its journey, it is the linkages with direct taxes that offer fiscal India the benefits of unintended consequences.

Like the GST, which has brought all indirect taxes under a single system over 17 years, direct taxes reform too has been a work in progress, across successive governments.

Take the journey of curbing direct taxes evasion. Two decades ago, in his 28 February 1997 budget, then Finance Minister P. Chidambaram proposed that residents in 12 large cities who satisfy two of four criteria (ownership of a four-wheel vehicle, occupation of immovable property meeting certain prescribed criteria, ownership of a telephone, and foreign travel in the previous year), must file tax returns. The next year, in his 1 June 1998 budget, then Finance Minister Yashwant Sinha extended that coverage to 35 cities, increased the criteria by two (holding credit card and membership of 'expensive' clubs), and increased the burden of filing to one of six criteria. He also made PAN (Permanent Account Number) mandatory for high value transactions — purchase and sale of immovable property or motor vehicles, transaction in shares exceeding Rs 50,000, opening of new bank accounts or fixed deposits of more than ₹50,000, applications for allotment of telephone connection, and payment to hotels exceeding ₹25,000. Four years later, in his 28 February 2002 budget, Sinha imposed a penalty of ₹10,000 for quoting a wrong PAN and further extended the list of transactions to include expenditure exceeding ₹25,000 incurred in cash on foreign travel, purchase of bank drafts exceeding ₹50,000 in cash and making cash deposits exceeding ₹50,000 in any bank account.

One Nation One Tax, Gautam Chikermane

On curbing evasion of indirect taxes, India's policy push has been to increase the number of taxpayers into the system by creating direct regulations. Chidambaram's 1997 budget, for instance, saw the introduction of 'Estimated Income Scheme' for retail traders, under which income of persons engaged in retail trade with a total turnover of less than ₹40 lakh would be estimated at 5% of turnover — if the income declared was lower than 5%, the assessee would have to maintain books of account and get them audited. This followed the failure of the '₹1,400' scheme, which attempted to enlarge the tax net by turning retail traders with turnovers of less than ₹5 lakh and profits of less than ₹35,000 into new taxpayers. The Rs 1,400 scheme was introduced by then Finance Minister Manmohan Singh in his 29 February 1992 budget. "This should enable potential taxpayers in this category to overcome their psychological hesitation of getting into the tax system," he had said. The scheme was introduced for two years in 1992, extended 'indefinitely' in 1994, and finally ended in 1997.

Read also | GST is a marathon, not a 100-metre dash

Two decades later, despite the changed economic landscape and greater transparency, the fears that caused the failure of the ₹1,400 scheme raised their head again. The demonetisation drive of 8 November 2016, under which RBI withdrew the status of legal tender from ₹500 and ₹1,000 notes, saw several businesses being forced to set up ewallets and credit card machines to collect money. But many still didn't — getting into the government's databases would bring with it the risk of further scrutiny and therefore a greater compliance burden.

Better to stay out, lie low, stay with cash and let things stabilise. It seems the 'psychological hesitation of getting into the tax system' of 1992 remains strong a quarter of a century later.

With the introduction of the GST and the allied databases linked, or if not linked, definitely open to cross checking of trails, the probability of a factory owner under-reporting production — for instance, by suppressing sales receipts, diverting sales to associate companies or stamping incorrect price on the invoice — and through it evading taxes has reduced, if not ended. The only way a downstream user can claim an input credit is when the primary feeder pays the GST. Earlier, the money saved by not paying taxes went to the pocket of the businessman, in cash, on which he paid no direct taxes either. This cash economy was out of the trackable system.

Now, not only does the GSTN infrastructure have the ability to track every invoice on the indirect taxes front, the direct taxes databases linked with Aadhaar can follow or take leads from them and walk these trails too. It is this collection of indirect taxes and its integration with direct taxes that will help multiply the system's power to flag evasion and evaders. For GST to work, all numbers in the network have to add up.

Theoretically, therefore, for the tax evader in the legitimate system, there is very little room for manoeuvre. That said, let us not underestimate the criminal mind — it has, and will always remain, a few steps ahead of all regulatory changes. The only thing we can say with a little conviction is that the cost of evasion in indirect taxes through GST and its pass-through to evasion in direct taxes has gone up sharply. This is good for the economic system, governments and taxpayers alike. In a business ecosystem, where evasion is more the norm than the exception, there was no moral stigma attached to it: those who paid their taxes were outliers. That will begin to change now. On its part, the government has reduced tax rates in the system, both direct and indirect. Today, they are in tune with any global standard. But since social habits die harder, India will need to keep pushing harder. Most evaders should fall in line, but the efforts to close the last loophole will remain. The GST marathon is one more step in the long journey of India towards curbing tax evasion — the destination, however, will remain a moving target.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...

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Guillermina French

Guillermina French

Guillermina French Fundacin Ambiente y Recursos Naturales (FARN)

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