If the government can mine data, GST is a goldmine of tax collection
After all the drama and politics over its rollout, the good and service tax (GST) has finally got implemented. The aim of the GST is to reform the indirect tax structure in India, which was not only most complex in the world but made India a country with the highest incidence of regressive indirect taxes.
By how much the incidence of indirect taxes will come down will be clear over a period of time, as the impact of structural changes of such magnitude will take time to assess. But there is another area where the tax reform being brought in by GST can have a major impact, and it will depend on the data collect through the Goods and Services Tax Network (GSTN). That area of potential improvement is the number of taxpayers who pay direct tax, which in India means income tax. It is well known that as a percentage of the total working population, the number of income tax payers in our country is abysmally low.
By some estimates, the total number of taxpayers is only 80 lakh. Of this, the majority comprises people who are either government employees or work for the private sector. Hence, they have no scope of hiding their income and evading taxes.
This clearly means that the large majority of traders and businessmen don’t pay taxes as they stay out of the system by doing their business in cash. Even if the transactions are digital, they keep the volumes so low that these are below the radar of the formal system. But with GST rollout, it will be very difficult for these businessmen to conceal their actual turnover.
Going forward, when a firm is forced to show higher turnover, profit would be higher as well and when profit is higher, then either the firm has to pay tax on that income. In case the owners are withdrawing income from the company, it will be added to their individual income.
The number of taxpayers and tax collection could see significant improvement if the government is able to mine data.
Now comes the question whether tax payers who enter into systems and start to pay direct taxes should be asked about details regarding their accumulated wealth, whether it was created after paying taxes or not. If one takes a moral stand, anyone in this country who had not paid taxes should be penalised, because leaving the dishonest taxpayer is actually incentivising tax evasion. However, it is also a fact that people avoided taxmen for fear of being harassed.
So, for a start it would be wise that unless there is incontrovertible evidence of mala fide, the government should allow people to settle into the new system instead of using the sledgehammer in the first instance. This is also what revenue secretary Hasmukh Adhia has said when asked about using the provisions of anti-profiteering legislation against businessmen — that the intent of the government is not to harass.
So, while implementing GST, the government should ensure that the system is built in such a way that it helps in data mining to increase the base of taxpayers. Should that happen, the top billing that the GST rollout has got from the government would indeed be justified.