This book is an important contribution to the literature on tax administration not merely because it contains a lot of Shastra, but it also has a considerable amount of Purana in it. Admittedly, the literature on tax administration is scarce, and this book is a welcome addition. It attempts to combine the principles (Shastra) with history and experience of a number of countries.
The book begins with an analytical framework keeping tax administration as one of the four wheels in the tax-expenditure system along with tax policy, expenditure policy and expenditure control. According to Shome, most experts on tax policy have ignored administrative aspects and vice versa. Although multilateral organisations do attempt to keep policy and administrative issues, they suffer from their own biases, hence the need to have a book for bridging policy with administration.
Shome places tax administration reform on three pillars. First, tax administration should be organised in terms of sectors and functions rather than geographical divisions. Technology allows functional division and looking at taxes with interdependent bases holistically. Second, information technology should be used not only in administering taxes but also in mining the information to formulate policy. The third pillar should be the interface between the taxpayer and tax administration to evolve a “stakeholder” approach and adoption of state-of-the-art managerial techniques to provide quality customer service.
The author is concerned about India’s low tax-to-GDP ratio and the need to expand the tax base to enhance revenues. It is argued that wide-ranging tax preferences and poor tax administration are the causes of low tax-to-GDP ratio, hence the need for tax administration reform. The book argues that with administrative reform, it is possible to increase the number of income taxpayers from the present 30 million to 60 million. Assuming a family size of five, there are 240 million families in India. Assuming, further, that 30 per cent of the households live in subsistence and 20 per cent are below the threshold, there will be 120 million potential taxpayers. If one-half of this is assumed to derive income from agriculture, we will have 60 million potential taxpayers! Unfortunately, this is too simplistic and based only on assumptions. Of course, there is significant scope for increasing the tax base with reform and a lot of the increase will have to come from both increasing the number of taxpayers and, more importantly, making existing taxpayers disclose their real incomes.
The book argues that there is much that is wrong with India’s tax administration. First, the two tax departments (the Central Board of Direct Taxes and the Central Board of Excise and Customs) are placed under the revenue department, which is headed by an Indian Administrative Service (IAS) officer who may or may not have expertise. As the expenditure of these tax departments is controlled by the revenue department, they do not have the required autonomy. Second, the two tax departments work independently of each other (except in Large Taxpayer Units) and do not share the information. When we have the technology to take a consolidated view of taxes on income and consumption, the separation of tax administration in terms of direct and indirect taxes has adversely impacted tax compliance. Third, the organisation of tax administration on geographical rather than sectoral/functional lines results in focusing on revenue maximisation rather than minimising the tax gap. Fourth, linking taxpayers to specified tax officials opens avenues for rent seeking. The managerial problems include centralised recruitment, barriers to lateral entry, and advancement based on seniority. Finally, there is lack of focus on specialised training. Shome strongly argues for the need to expose the young officers of the tax departments to tax administrations in advanced countries.
Most of these problems have been pointed out in earlier studies. In a rigorous study, “Incentives and Institutional Reform in Tax Enforcement”, Arindam Das-Gupta and Dilip Mookherjee bring out the need for reform in both organisational and managerial aspects of tax administration in India. They highlight the need to enhance functional autonomy of the tax department. Of course, this does not take away the usefulness of the present study, for these issues need to be revisited from time to time to build a constituency for reform.
It is also important to work out the strategy for implementing them and the book does not offer much assistance on this. It is necessary to sequence the reforms and work out the transitional steps. The heart of the problem is the political economy. Besides the political will, would the Indian Revenue Service officers agree to lateral entries of professionals when the opportunities for them at higher levels are very limited, and when no such reform is done in the IAS? Will the government have the political will to give the required autonomy to tax departments? Can the government work out a system to reorganise the administration on functional lines? The government has not acted even on the limited reforms that the Administrative Reforms Commission had recommended.
All in all, this is an important read for students of tax policy and administration as well as tax administrators.
The reviewer is Director, National Institute of Public Finance and Policy
Administrative Reforms in India, United Kingdom and Brazil
BS Books; 207 pages; Rs 450