Tax compliance is a complex phenomenon that is governed by a variety of factors. Some of these factors are, tax rates, complexity of laws, procedures, forms and returns, the efficiency of tax administration including tax audits and the legal consequences of non-compliance. The reforms in indirect taxes in the last two decades could be said to have reduced the cost of compliance to the trade and industry. We are talking of compliance cost as a percentage of the total cost of running the business.
Take the first factor of tax rates. It is quite obvious that the higher the tax rate, the greater the incentive for not complying. A moderate tax rate finds greater acceptance among the tax payers. During the last two decades, as a part of the economic reforms introduced by the Government of India, excise duties on manufactured goods and customs duties on imported goods have been brought down steadily. The mean Cenvat rate of excise duty on manufactured goods has come down to 10 percent. Input duty credit on both goods and services used as inputs is available leading to the cash outgo by way of tax on outputs seeing significant reduction. All this has made it easier for a tax payer to comply with the tax laws. Reduction in import tariffs has led to similar results.
Complexity in tax laws also incentivises non compliance. If there are multiple rates for a particular tariff heading, then a tax payer is tempted to classify his product under the category that would attract a lesser duty rate. This leads to disputes between the tax payer and the tax administration which would push up the cost of compliance. The elimination of many special exemptions including end-use based exemptions has reduced such disputes. Of course there are still a lot of exemptions dotting the tariff but still it cannot be denied that the tariffs-both excise and customs have become less complicated than what they were before.
Procedural reforms like paying excise duty on a monthly basis instead of on a transaction basis, SSI units paying duty on a quarterly basis, introducing a system of self assessment of taxes, automation initiatives including e-filing of returns and e-payment of taxes have all reduced the cost of compliance to the tax payer.
Some penal provisions have been made more stringent. Some new provisions like taking deterrent action even before completion of investigations have also improved compliance.
The economic reforms have opened up the economy by virtually dismantling licensing controls, incentivising FDI and increasing competition from imports. The Indian industry and trade have responded magnificently to these changes. By modernising the production processes, cutting down costs ,better inventory control and supply chain systems etc, the Indian industry has not only survived but also shown a robust growth. In this the contribution of tax reforms is also significant.
(The author is associated with Institute of Business Laws, New Delhi and was formerly Chairman, Central Board of Excise and Customs, New Delhi)