Widening of Tax Base and Evasion of Tax: Thirty-third Report of the Standing Committee on Finance (2005-06)

The challenge to the tax system to expand both the revenue base and progressively bring into the net larger number of taxpayers remains as daunting as ever. The object is not to ignore the generally beneficial impact of deregulation and tax friendly measures in providing a more conducive environment for tax compliance. Nor can it be suggested that tax reform be rolled back. But equally the reports of tax evasion, and poor compliance from particular sectors highlights the tax administrators belief/experience that certain sectors are more evasion prone often inviting the honorific of ‘Traditional Evaders’. The long term tax policy of the Government should essentially centre on expanding the tax base inter alia by limiting and rationalising the exemption provisions and factoring the changing sector profile of the GDP growth in the tax base. Considering the growth rate being witnessed in the economy and the resultant spurt in both corporate and individual incomes, the Committee feel that the number of tax assessees should be much higher possibly five times the existing number. The Committee, therefore, urge upon the Government to bring a larger number of people in the assessee base. The Committee hope that the objective of eliminating the deficits as envisaged under the FRBM Act would be put back on track by reclaiming the ground lost in reducing the fiscal deficit due to pressing of the ‘pause’ button. The Committee note that various exemptions and concessions extended under the Tax Laws are to serve a number of social and economic objectives. They, however, feel that prolonged continuance of such exemptions may turn detrimental to the economy as they deplete considerable portion of tax base, which, in their opinion is badly needed to be strengthened in order to meet the developmental objectives. So far as indirect taxes are concerned the Committee agree that exemptions are necessary but prolonging the exemptions indirectly encourage incompetence and makes domestic industry shy away from competition and growth. Further, they erode a major part of the revenue base. The Committee feel that with the rapid globalization and opening of the economy, the country and its industry should be better prepared to stand on their own without any substantial fiscal assistance from the Government. The unanimous view expressed before the Committee is that the time has come to bring all the services barring the basic and essential ones in the tax net. The Committee, therefore, reiterate their earlier recommendation that all the services, barring the essential or basic ones, should be brought under the tax net in one go.