‘Need clear rules to stop harassment by taxman’

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NITI Aayog vice-chairman Arvind Panagariya expects a positive impact of demonetisation on the economy as it will get more people into the tax net and create room for a lower burden. In an interview with TOI he also suggests clear rules to prevent possible harassment by tax authorities. Excerpts:

Has the demonetisation process served its purpose?

Yes. First, all black wealth, which existed as on November 8 in cash, has been extinguished. There has been a decline in black wealth held in real estate since the expectation that the proportion of payment in white in future real estate deals will rise has led to a decline in real estate prices. The government stands to collect a large sum of extra financial resources that would allow it to build economic and social infrastructure and combat poverty while staying course on its fiscal consolidation plan.

What immediate gains do you see for the economy?

Demonetisation has triggered the process of greater formalisation of the economy. It has served as the occasion to push for payments digitisation in a big way, which would improve economic efficiency. Formalisation will also bring larger proportion of personal savings into the banking system thereby improving the efficiency of their use. For the first time since independence, those who profit from black-economy transactions are on the run. This is already doing wonders to boost the morale of the vast majority of the nation’s citizens who transacted honestly but got the raw end of the deal till now.

What are the other measures that the government should take to curb black money?

Just as we have taken tough actions against officials who have been caught illegally converting notes that are no longer legal tender into those that are legal tender, we need to bring to book officials who extract bribes for rendering services that are legitimately due to citizens or for facilitating acts that are illegal such as tax evasion. We also need to simplify our tax system and codify rules with precision so that the room for interpretation by tax officials is minimised.

There is a fear that the demonetisation process will see a return of the taxman. What would your advice be to the government to rein in the taxman?

We need to lay down clear rules to minimise the room for tax officers to decide whether tax is due or not in a given situation. I will give two examples. First, we could adopt a rule that barring exceptional circumstances bank deposits made between November 8 and December 30 below a specified threshold will not be subject to scrutiny. Second, we could adopt a rule that a certain proportion of taxable income during specified number of previous years will be treated as housewife’s savings and deposits resulting from them will not be scrutinised. In other cases, we should run audits using data analytics instead of letting tax officers take a call. This would eliminate the interface between the taxpayer and tax officer and minimise scope for extracting bribes.

Gradually, we should see the benefits of the reforms done since May 2014 to begin paying dividends. Therefore, I expect growth to accelerate. This will allow us to continue to invest more in economic and social infrastructure.

Auditors and such professional responsible for tax compliance should be held responsible for all deviations, lapse and non-compliance as it is their core duty. They get paid for it but playing naive …

The top priority guiding the budget should be job creation. As regards taxation, we must embark upon major simplification of the direct taxes, both personal and corporate. We must also broaden the tax base. This would open the door to some reduction in the tax rates without a fall in tax revenue.