How credible is the taxman?

It is customary for newspaper columnists to give the finance minister lots of unsolicited advice in the run-up to the Budget. Here's my contribution for Budget 2005-06.

While suggestions made this late obviously have no chance of making it to the coming Budget, the basic points I would like to drive home do not require any major amendment of tax laws. It has to do with amending the taxman's mindset, and his sense of accountability to taxpayers.

Many taxpayers may have noticed recent advertisements released by the department of income tax asking citizens to pay their taxes as part of "your contribution to nation-building".

The baseline also says: "Your tax is your investment in your future." Words like "contribution" and "investment" are clearly suggestive of a growing awareness in official circles that taxes are paid not just because the government of the day says so, but because it goes to finance something important for the citizen, taxpayers included.

These ads are a tacit acknowledgement that there has to be some degree of reverse accountability to taxpayers. Unfortunately, the tax department has very low credibility with honest taxpayers right now. For several reasons.

One, when voluntary disclosures and forgive-and-forget schemes are announced in practically every other Budget, taxpayers know that the government is literally pleading with tax evaders to pay up. It also means that those who cannot evade tax -- like salaried employees -- contribute a disproportionate share of resources to "nation-building".

Second, few citizens really believe the government when it swears by high principle. It is all right for ads to claim that the taxes collected will go towards nation-building, but how can anyone believe that when tax officials are found sitting on wads of currency notes? Maybe most of the money is going to feed bureaucrats and very little to feed the poor or build a bridge somewhere.

Third, it is distressing to see the tax department making claims that may or may not prove true. A case in point is a recent ad explaining why the value-added tax is good for the citizen. Among other things, the ad says that VAT will moderate taxes and prices in general.

Though this is not a claim made by the tax department (it is made by the empowered committee of state finance ministers), the principle is the same. While it is fair to explain the advantages of VAT from a long-term point of view, it is by no means certain that the tax will moderate prices -- at least in the first year of implementation.

Given the level of sales tax evasion everywhere, one suspects that the imposition of VAT may end up increasing prices as previously non-taxpaying traders start paying up. This might well raise prices in the short run before the system digests VAT. Making unprovable claims is not the best way to improve the accountability and credibility of the revenue department.

Taxpayers will start believing in the tax department when they see things happening with their own eyes. For example, what stops the department from offering instant refunds (say, amounts up to Rs 2,000) for small taxpayers who have little more than salary incomes to show?

All you need is to open scores of temporary counters in the main cities, organise quick scrutinies of returns, and ask officials to write out cheques the same day for those willing to wait an hour or two for the same.

If banks can organise loans in 30 minutes for car buyers -- a tougher thing to do, since one is assessing a person's creditworthiness -- I see no reason why the tax department can't do the same with what is my money anyway.

A simple initiative like this -- which may not involve payments of more than a couple of hundred crores nationwide -- would immediately improve the tax department's credibility. It would achieve better results than exhorting taxpayers to pay up by advertising heavily in newspapers and TV channels.

There are several other ways the department can score brownie points with taxpayers. One is to e-enable tax payments and refund operations so that most citizens do not need to interface with corrupt officials at all.

If banks can offer Internet banking and conduct millions of transactions without manual intervention, there is no reason why the tax department cannot do so, too.

Look at the speed with which PAN cards have been issued after the taxman's role was reduced. One suspects that it is corrupt officials who are responsible for slowing down moves towards greater transparency and better service to taxpayers.

It's also time to create an external ombudsman for the tax department, for aggrieved taxpayers to take their problems to. If the government packs the ombudsman's office with public-spirited people, over a period of time the credibility of the taxman can only improve.

Budget or no Budget, the finance minister will have to deal with the issue of enhancing the taxman's accountability to the public sooner or later.