As the financial year 2013-14 draws to an end, tax authorities continue to grapple with collection targets. The fear looming ahead points towards, perhaps, another year of failed fiscal revenue estimates. The interim budget statistics reveal that the much-hyped fiscal consolidation in 2013-14 was achieved on account of reduced government expenditure, and not higher revenues. India continues to report a below average tax-GDP ratio, 17.2% in 2012-13, which is much lower than the average 22% in other BRIC countries, and 17.7% in lower middle-income economies.
While the government’s unsuccessful attempts at raising tax revenues can be partially attributed to the global economic slowdown in the last couple of years, the bigger challenge probably lies in the inefficiency of the overall tax system, including both policy and administration. The government raises revenue through two broad types of taxes – direct and indirect. Though indirect taxes are regressive in nature, they are easy to administer and collect. On the other hand, direct taxes in India are progressive and based on a system of voluntary self-assessment; this however, increases the burden on tax administrators to identify default and/or non-compliance. In such a system, the perception of taxpayers towards the department (government) and the latter’s ability to appropriately utilise tax revenue can play a key role in ensuring compliance and tax collection.
In a pilot survey conducted for an ongoing study on barriers to compliance and cost of compliance for direct taxes in India, it was found that Indian taxpayers appreciate government initiatives related to digitization and improved communications. According to recent statistics , more than thirty million taxpayers filed online returns in the financial year 2012-13. This is much higher than the number in developed countries such as Australia where taxpayers continue to paper-file their returns despite an established e-filing system. The survey revealed that the challenge lay in responses that did not reflect taxpayers’ confidence in the government to address concerns of economic well-being and overall development. Recent initiatives on tax reforms, some which have been implemented (such as Large Taxpayer Units, Safe Harbour Rules) and others that are still being debated or recasted (such as Direct Tax Code, Goods and Services Tax) have not seen much traction. Indian taxpayers continue to remain unimpressed by its institutions, which they believe, in Acemoglu and Robonson’s vocabulary, are extractive.
Tax authorities in all countries face scepticism from taxpayers. Governments acknowledge the adverse impact of ‘trust deficit’ on compliance and tax collections. They have, therefore, worked towards changing the taxpayers’ perception and reinstating their faith in public institutions. Countries like Australia and UK have transitioned from confrontational compliance models to co-operative compliance models. Her Majesty’s Revenue and Customs (HMRC), UK, has dedicated customer relationship managers and customer coordinators who shadow a large business for tax purposes. An important part of enforcement and compliance strategy is working on psychological aspects of compliance. In the UK, nudge letters prepared by a behavioural insight teams are customized for different categories of taxpayers to discourage evasion.
The Australian Tax Office (ATO) follows a Taxpayer Charter with a dedicated annual Compliance Program. Under this program, a model (Fig 1) has been developed to understand economic, psychological, and industry-specific factors that influence compliance behaviour across different taxpayer groups. The structured pyramid represents willing taxpayers at the bottom and the unwilling category at the top. Accordingly, compliance strategies are soft towards people at the bottom but stringent for those at the top. This compliance pyramid is not only useful to adopt the right approach towards compliance and judiciously allocate resources, it also helps establish fairness and instils confidence among taxpayers.
Regulatory Impact Assessments (RIAs) is another policy tool that reflects the government’s diligence in policy making. Countries such as UK, Australia, and New Zealand have formalised processes and dedicated teams engaged in RIAs that help avoid policy flip-flops – a perennial problem in India.
Economic and administrative motivations of policymakers in India must not overlook perception management, a subtle yet integral piece of successful policy implementation. The ideas illustrated above are simple and effective solutions for establishing the right perception of government institutions. Adam Smith’s four canons of taxation – equity, economy, certainty, and convenience also beckon the need to establish a trust-based relationship between taxpayers and tax authorities.
 Center for Budget and Governance Accountability
 Regressive with respect to disposable income
 Based on interactions with the Directorate of Income Tax, Ministry of Finance