CHAPTER 7 PERCEPTION OF TAX PROFESSIONALS REGARDING INCOME TAX SYSTEM IN INDIA

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1 CHAPTER 7 PERCEPTION OF TAX PROFESSIONALS REGARDING INCOME TAX SYSTEM IN INDIA Tax professionals play an important role in the implementation of income tax law of the country. They help the taxpayers in efficient management of tax affairs and discharging their tax obligations. They are well aware of the weaknesses of tax law, tax administration and problems faced by taxpayers. So, they can be helpful in understanding the various aspects of income tax system. In this chapter an attempt has been made to examine the perception of tax professionals regarding income tax system in India. This chapter has been divided into two sections. Section-1 deals with the general profile of the respondents and Section-II attempts to examine their opinion regarding various important aspects of income tax system in India. SECTION 1 The general profile of 250 respondents (Practicing Chartered Accountants) is presented below. The basic attributes of the respondents studied are age, work experience, gender, location and annual income. 7.1 LOCATION/AGE-WISE DISTRIBUTION Location-wise 50 respondents each have been selected from five locations viz. Chandigarh (L 1 ), Patiala (L 2 ), Ludhiana (L 3 ), Jalandhar (L 4 ) and Amritsar (L 5 ). Age-wise respondents surveyed have been divided into four age groups viz. Below 30 years, 30 but below 45 years, 45 but below 60 years and 60 or above 60 years. Table 7.1 depicts age-wise / location-wise distribution of the respondents. 169

2 TABLE 7.1 LOCATION-WISE /AGE-WISE DISTRIBUTION OF RESPONDENTS Age Groups L 1 L 2 Locations L 3 L 4 L 5 Total Below 30 years (24) (16) (22) (14) (6) (16.4) 30 but below years (60) (74) (56) (58) (40) (57.6) 45 but below years (16) (10) (22) (20) (50) (23.6) 60 or above years (0) (0) (0) (8) (4) (2.4) N (100) (100) (100) (100) (100) (100) Note: 1. N in this table and all the tables to follow represents total number of respondents. 2. Figures in parentheses in this table and all the tables to follow represent percentages while figures without parentheses represent simple frequencies. The Table reveals that 57.6 per cent of the respondents belong to age group 30 but below 45 years. It is followed by age groups 45 but below 60 years (23.6%), Below 30 years (16.4%) and 60 or above 60 years (2.4%). Location-wise, majority of the respondents from all the locations except L 5 belong to the age group 30 but below 45 years. In case of location L 5 majority of the respondents (50%) belong to age group 45 but below 60 years. 7.2 EXPERIENCE- WISE / LOCATION-WISE DISTRIBUTION Table 7.2 shows experience-wise/location-wise distribution of the respondents. Experience-wise respondents surveyed have been divided into four groups, viz. Below 5 years, 5 but below 10 years, 10 but below 20 years and 20 or above 20 years. Table 7.2 reveals that 39.2 per cent respondents have experience of 10 but below 20 years. It is followed by respondents having experience of 5 but below 10 years (32.8%), Below 5 years (17.2%) and 20 and above 20 years TABLE

3 EXPERIENCE-WISE/LOCATION-WISE DISTRIBUTION OF RESPONDENTS Experience Locations Total L 1 L 2 L 3 L 4 L 5 Below 5 years (28) (12) (26) (16) (4) (17.2) 5 but below 10 years (48) (46) (34) (20) (16) (32.8) 10 but below 20 years (20) (38) (36) (54) (48) (39.2) 20 or above 20 years (4) (4) (4) (10) (32) (10.8) N (100) (100) (100) (100) (100) (100) (10.8%). So, majority of the respondents (72%) have experience more than 5 but below 20 years. Further, the same trend is visible in all the locations. The proportion of the respondents having experience 20 or above 20 years is very low in locations L 2, L 1 and L 3 (4% each), while this proportion is comparatively higher in case of location L 5 (32%). 7.3 GENDER-WISE/ LOCATION-WISE DISTRIBUTION TABLE 7.3 GENDER -WISE/ LOCATION-WISE DISTRIBUTION OF RESPONDENTS Gender Locations Total L 1 L 2 L 3 L 4 L 5 Male (84) (88) (92) (90) (96) (90) Female (16) (12) (8) (10) (4) (10) N (100) (100) (100) (100) (100) (100) Table 7.3 indicates that majority of the respondents (90%) are male. Location-wise, the trend remains the same in all the locations. However, the 171

4 proportion of female respondents is comparatively higher in case of location L 1 (16%). 7.4 INCOME-WISE/ LOCATION-WISE DISTRIBUTION Income-wise respondents have been divided into four groups on the basis of their annual income viz. Below Rs , but below Rs , but below Rs and or above Rs TABLE 7.4 INCOME-WISE/ LOCATION-WISE DISTRIBUTION OF RESPONDENTS Income Locations Total L 1 L 2 L 3 L 4 L 5 Below Rs (12) (8) (16) (4) (4) (8.8) but below Rs (58) (70) (52) (56) (46) (56.4) but below Rs (24) (22) (30) (32) (48) (31.2) or above Rs (6) (0) (2) (8) (2) (3.6) N (100) (100) (100) (100) (100) (100) Table 7.4 exhibits that majority of the respondents (56.4%) belong to income group but below Rs followed by income group but below Rs (31.2%), Below Rs (8.8%) and or above Rs (3.6%). Location-wise, the table reveals that majority of the respondents from all the locations except L 5 belong to income group but below Rs In case of location L 5, 48 per cent the respondents belong to income group but below Rs and 46 per cent belong to income group but below Rs

5 SECTION II This section examines the perception of tax professionals regarding reasonability of income tax rates, most suitable tax rate system for our country, introduction of exempt exempt tax system, tax incentives, tax evasion, corruption, reasons for delay in refunds, problems faced by taxpayers, physical environment prevalent in the income tax offices, impact of computerisation on administrative efficiency, completion of assessments and reasons for which tax professionals are consulted by taxpayers etc. Further, this section also analyses their views on simplification of tax system, exiting Government action, taxation of agricultural income, quality of services provided by income tax administration, measures for making the tax system taxpayer friendly etc. 7.5 TAX RATES FOR DIFFERENT PERSONS Tax rate structure is the main component of tax policy of any country. It affects tax base and tax compliance to a large extent. It is believed that lower tax rates lead to higher compliance and vice versa. In our country there are different tax rates for different persons. So, an effort has been made to understand the opinion of tax professionals regarding reasonability of tax rates for different types of persons i.e. Individuals, HUFs, AOPs, BOIs, Firms and Companies. The opinion has been obtained on a five point scale ranging from too high to too low. The responses of the respondents on the income tax rates for different persons have been shown in Tables 7.5 to 7.8 TABLE 7.5 OPINION OF RESPONDENTS REGARDING TAX RATES FOR INDIVIDUALS & HUFS Opinion Locations Total 173

6 L 1 L 2 L 3 L 4 L 5 Too high (6) (2) (20) (8) (2) (7.6) High (56) (16) (36) (46) (32) (37.2) Reasonable (38) (82) (44) (46) (66) (55.2) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. = 8, Significant at 5 per cent level of significance Table 7.5 highlights that 55.2 per cent of the respondents believe that tax rates for individuals and HUFs are reasonable. However, 44.8 per cent of the respondents have considered it high or too high. None of the respondents have considered it low or too low. Location-wise analysis depicts that majority of the respondents from locations L 2 (82%) and L 5 (66%) believe that tax rates for individuals and HUFs are reasonable, whereas the respondents from location L 1 (62%) followed by locations L 3 (56%) and L 4 (54%) have considered it high or too high. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to reasonability of income tax rates for individuals and HUFs. Table 7.6 shows that 66 per cent of the respondents have considered tax rates high or too high for AOPs and BOIs. It is followed by the respondents who have considered it reasonable (33.2%) or low (0.8%). None of the respondents have considered it too low. Location-wise analysis reveals that vast majority of the respondents from locations L 1 (88%), L 3 and L 4 (70% TABLE 7.6 OPINION OF RESPONDENTS REGARDING TAX RATES FOR AOPS AND BOIS Opinion Locations Total 174

7 L 1 L 2 L 3 L 4 L 5 Too high (16) (8) (16) (6) (2) (9.6) High (72) (34) (54) (64) (58) (56.4) Reasonable (10) (56) (30) (30) (40) (33.2) Low (2) (2) (0) (0) (0) (0.8) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =12, Significant at 5 per cent level of significance each) and L 5 (60%) have considered the rates high or too high. However, majority of the respondents from location L 2 (56%) have considered the rates reasonable. Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to reasonability of income tax rates for AOPs & BOIs. TABLE 7.7 OPINION OF TAX PROFESSIONALS REGARDING TAX RATES FOR FIRMS Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Too high (66) (20) (30) (18) (10) (28.8) High (28) (58) (58) (60) (74) (55.6) Reasonable (6) (20) (10) (22) (16) (14.8) Low (0) (2) (2) (0) (0) (0.8) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =12, Significant at 5 per cent level of significance Table 7.7 reveals that 84.4 per cent of the respondents believe that tax rates for firms are high or too high. It is followed by the respondents who have considered it reasonable (14.8%) or low (0.8%). None of the respondents have considered it too low. Location-wise analysis shows that vast majority of the 175

8 respondents irrespective of their locations have opined that tax rates are high or too high. Chi-square test at 5 per cent level of significance shows that significant opinion differences exist among the respondents from various locations with regard to reasonability of income tax rates for firms. Table 7.8 highlights that 76.8 per cent of the respondents have considered tax rates for companies high or too high, whereas 21.2 per cent have considered it reasonable. Only 2 per cent respondents have considered it low. Location-wise analysis reveals that major proportion of the respondents irrespective of their locations have considered tax rate for companies high or too high. A very low proportion of respondents from locations L 3 & L 4 (4% each) and L 2 (2%) have considered it low. None of the respondents from locations L 1 and L 5 have opined it low. Further, Chi-square test at 5 per cent TABLE 7.8 OPINION OF TAX PROFESSIONALS WITH REGARD TO TAX RATES FOR COMPANIES Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Too high (74) (22) (30) (20) (10) (31.2) High (20) (44) (48) (50) (66) (45.6) Reasonable (6) (32) (18) (26) (24) (21.2) Low (0) (2) (4) (4) (0) (2) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =12, Significant at 5 per cent level of significance level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to reasonability of income tax rates for companies. 176

9 7.6 TAX RATE SYSTEM There are three main tax rate systems followed by different countries all over the world viz. flat, progressive and regressive. Every system has its own merits and demerits. Progressive tax rate system reduces income inequality but it creates incentives for income splitting techniques. It is considered as a tax on efficiency. Flat rate system is very simple to implement but it ignores the principle of capacity to pay. Regressive tax rate system motivates for more work but it again ignores the principle of capacity to pay. Tax professionals were asked to state the most suitable tax system for our country i.e. progressive, flat or regressive. Their responses have been shown in Table 7.9 TABLE 7.9 OPINION OF RESPONDENTS REGARDING MOST SUITABLE TAX RATE SYSTEM Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Flat (22) (26) (22) (26) (32) (25.6) Progressive (78) (66) (72) (72) (52) (68) Regressive (0) (8) (6) (2) (16) (6.4) N (100) (100) (100) (100) (100) (100) Chi-Square value =16.320, d. f. =8, Significant at 5 per cent level of significance Table 7.9 reveals that 68 per cent of the respondents have given their preference for progressive tax rate system. It is followed by those respondents who preferred flat tax rate system (25.6%) and regressive tax rate system (6.4%). Location-wise analysis shows that vast majority of the respondents from all the locations i.e. L 1 (78%), L 3 & L 4 (72% each), L 2 (66%) and L 5 (52%) have preferred progressive tax rate system for our country. Regressive 177

10 tax rate system has been least preferred in all the locations. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to most suitable tax rate system for our country. 7.7 TAX INCENTIVES 178 Tax incentives have been widely used all over the world as an instrument of fiscal policy for achievement of various purposes. In India, tax incentives are granted to various taxpayers for achieving various socio- economic objectives such as mobilisation of savings, promoting investment in priority sectors, maintaining regional balance, development of education, welfare of senior citizens etc. However, some experts have recommended the elimination of tax incentives from time to time on the ground that these lead to complication and inefficiency in the tax system. Therefore, the respondents were asked to express their opinion on a five point scale (ranging from strongly agree to strongly disagree) regarding complete phasing out of tax incentives. The responses have been shown in Table 7.10 Table 7.10 highlights that only 30 per cent of the respondents have agreed or strongly agreed with the opinion of phasing out of tax incentives completely. However, 56.8 per cent of the respondents have disagreed or strongly disagreed with it and 13.2 per cent have been indifferent. Location- TABLE 7.10 OPINION OF TAX PROFESSIONALS REGARDING PHASING OUT OF TAX INCENTIVES Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Strongly agree (0) (12) (6) (10) (6) (6.8)

11 Agree (14) (18) (20) (42) (22) (23.2) Neither agree nor disagree (6) (16) (20) (12) (12) (13.2) Disagree (80) (42) (52) (36) (60) (54) Strongly disagree (0) (12) (2) (0) (0) (2.8) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =16, Significant at 5 per cent level of significance wise analysis reveals that majority of the respondents from locations L 1 (80%), L 5 (60%), L 2 & L 3 (54% each) have disagreed or strongly disagreed with this opinion. However, in case of location L 4 majority of the respondents i.e. 52 per cent have agreed or strongly agreed with this opinion. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to complete phasing out of tax incentives. 7.8 REASONS FOR PHASING OUT TAX INCENTIVES 75 respondents who agreed or strongly agreed with the opinion that tax incentives should be phased out were further requested to identify the possible reasons for the same. Their responses have been consolidated in Table 7.11 Table 7.11 reveals that majority of the respondents have favoured phasing out tax incentives as these incentives open loopholes for tax avoidance TABLE 7.11 PERCEPTION OF TAX PROFESSIONALS REGARDING REASONS FOR PHASING OUT TAX INCENTIVES Reasons Locations L 1 L 2 L 3 L 4 L 5 Total Open loopholes for tax Avoidance (100) (73) (85) (69) (71) (76) Distort investment choice

12 (43) (60) (54) (65) (57) (59) Increase administrative Burden (71) (53) (69) (31) (36) (47) High tax exemption limit (29) (67) (46) (54) (57) (53) Distort principle of equity (43) (27) (31) (42) (50) (39) Growth of one sector may be at the cost of another (43) (40) (62) (46) (93) (56) Make law complicated (43) (53) (54) (42) (50) (48) Create corruption (43) (53) (38) (58) (14) (44) Complicate procedure (14) (33) (23) (19) (29) (24) Increase litigation (43) (27) (31) (35) (36) (33) Reduce tax base (71) (67) (54) (65) (64) (64) N Note: Percentages are more than 100 because of multiple choices. (76%), reduce tax base (64%), distort investment choice (59%) and affect the growth of other sectors negatively (56%). They also viewed that prevailing high tax exemption limit (53%) is important ground for phasing out tax incentives. Further, a large number of the respondents have pointed out that incentives make law complicated (48%), increase tax administration burden (47%), create corruption (44%), distort equity principle (39%) and complicate procedure (24%). Location-wise analysis reveals that majority of the respondents irrespective of their locations opined that incentives open loopholes for tax avoidance and reduce tax base. Further, majority of the respondents from all the locations except L 1 have viewed incentives distort investment choice. The respondents from locations L 1 (71%), L 3 (69 %) and L 2 (53%) were against tax incentives due to their opinion that incentives lead to additional tax administrative burden. In addition to these, the respondents from 180

13 locations L 2 (67%), L 5 (57%) and L 4 (54%) have viewed that incentives should be phased out as prevailing tax exemption limit is high. Further, the respondents from locations L 3 (54%), L 2 (53%) and L 5 (50%) viewed that incentives make law complicated. The respondents from locations L 5 (93%) and L 3 (62%) have opined that incentives affect the growth of other sectors negatively and the respondents from locations L 4 (58%) and L 2 (53%) viewed that incentives create corruption in the tax system, so these should be phased out. It can also be noted that a small number of respondents from all the locations have pointed out that incentives complicate procedure and increase litigation. 7.9 INTRODUCTION OF EET SYSTEM There has been considerable discussion during the past few years about the shifting from the EEE to EET tax regime in our country. (E stands for exempt and T stands for tax). EET tax regime is basically to exempt income at the time of investment and during the tenure of investment but to tax the proceeds of investment along with benefits in form of interest, dividend etc. at the time of maturity or sale of investment. Thus, in reality there is no exemption from tax but only deferment of tax. The respondents were asked to express their opinion regarding maturity of Indian Income Tax system for introduction of EET in India on a five point scale (ranging from strongly agree to strongly disagree). Their responses have been depicted in Table 7.12 TABLE 7.12 OPINION OF RESPONDENTS REGARDING INTRODUCTION OF EET SYSTEM Opinion Locations Total 181

14 L 1 L 2 L 3 L 4 L 5 Strongly agree (0) (0) (0) (2) (16) (3.6) Agree (8) (22) (12) (18) (12) (14.4) Neither agree nor disagree (6) (28) (24) (20) (10) (17.6) Disagree (86) (34) (58) (56) (50) (56.8) Strongly disagree (0) (16) (6) (4) (12) (7.6) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =16, Significant at 5 per cent level of significance 182 Table 7.12 shows that only 18 per cent of the respondents have strongly agreed or agreed with the statement that Indian Income Tax system is mature enough to introduce EET whereas, majority of the respondents (64.4%) have disagreed or strongly disagreed with this statement. However, 17.6 per cent of the respondents have been indifferent towards it. Location-wise analysis reveals that majority of the respondents irrespective of their locations have disagreed or strongly disagreed with the idea of introduction of EET. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to introduction of EET in India TAX RATE SYSTEM ON SAVINGS AT THE TIME OF MATURITY 45 respondents who favoured introduction of EET were further asked what tax rate system viz. flat, regressive or progressive should be applied on savings at the time of maturity. The responses obtained have been shown in Table 7.13 TABLE 7.13

15 OPINION OF TAX PROFESSIONALS REGARDING TAX RATE SYSTEM TO BE APPLIED ON SAVINGS AT THE TIME OF MATURITY Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Flat rate (25) (54.5) (66.7) (60) (35.7) (48.9) Regressive rate (0) (0) (0) (10) (42.9) (15.5) Progressive rate (75) (55.5) (33.3) (30) (21.4) (35.6) N (100) (100) (100) (100) (100) (100) Chi-Square value =14.784, d. f. =8, Not significant at 5 per cent level of significance Table 7.13 shows that a major proportion of the respondents (48.9%) have preferred flat rate system. It is followed by the respondents who have preferred progressive tax rate system (35.6%) and regressive tax rate system (15.5%). Location- wise analysis reveals that majority of the respondents from location L 3 (66.7%), L 4 (60%) and L 2 (54.5%) have preferred flat rate system for taxing the maturity proceeds of investment. A vast majority of the respondents from location L 1 (75%) have preferred progressive tax rate system. However, in case of location L 5 responses have been mixed per cent of the respondents have preferred regressive tax rate system followed by flat rate system (35.7%) and progressive rate system (21.4%). Further, Chi-square test at 5 per cent level of significance reveals that no significant opinion differences exist among the respondents from various locations with regard to tax rate system to be applied on savings at the time of maturity TAX EVASION Tax evasion refers to the efforts by an assessee to evade taxes by illegal means. This entails dishonest tax reporting and hiding of income. It generates 183

16 black money and results in loss of Government revenue. It is not only detrimental to the economic progress of the country but also harmful for the society at large. With a view to understand the perception of tax professional on this issue, the respondents were asked to express their view on a five point scale (ranging from strongly agree to strongly disagree) with regard to the statement Tax evasion is very high in India. Their responses have been presented in Table 7.14 TABLE 7.14 OPINIONS OF TAX PROFESSIONALS REGARDING TAX EVASION IN INDIA Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Strongly agree (24) (42) (40) (30) (30) (33.2) Agree (72) (56) (52) (70) (58) (61.6) Neither agree nor disagree (0) (2) (6) (0) (4) (2.4) Disagree (4) (0) (2) (0) (8) (2.8) N (100) (100) (100) (100) (100) (100) Chi-Square value =19.6, d. f. =12, Not significant at 5 per cent level of significance Table 7.14 reveals that vast majority of the respondents (94.8%) have agreed or strongly agreed with the statement Tax evasion is very high in India. It is followed by the respondents who have disagreed with this statement (2.8%) and have neither agreed nor disagreed (2.4%). None of the respondents have strongly disagreed with this statement. Location-wise analysis shows that majority of the respondents from all the locations viz. L 4 (100%), L 2 (98%), L 1 (96%), L 3 (92%) and L 5 (88%) have agreed or strongly agreed with this statement. Further, Chi-square test at 5 per cent level of 184

17 significance reveals that no significant opinion differences exist among the respondents from various locations with regard to tax evasion in India REASONS FOR TAX EVASION IN INDIA 237 respondents who have agreed or strongly agreed with the statement Tax evasion is very high in India were further requested to identify the probable reasons for the same. Their responses have been presented in Table 7.15 Table 7.15 shows that majority of the respondents have identified Multiple taxes (73.8%), High tax rates (66.2%), If caught it could be managed (64.1%), Social acceptance of tax evasion (53.6%), 'Low probability of detection (48.9%), Inefficiency in income tax department (43.9%) and Low tax morality (42.6%) as main reasons responsible for tax evasion in India. The reasons which have been given less weightage are Ineffective penalty & prosecution provisions (23.2%) and Taxpayers` perception that Government does not spend tax revenue prudently (32.5%). TABLE 7.15 PERCEPTION OF RESPONDENTS REGARDING REASONS FOR TAX EVASION IN INDIA Reasons Locations L 1 L 2 L 3 L 4 L 5 Total High tax rates (79.2) (61.2) (54.3) (60.0) (77.3) (66.2) If caught it could be managed (64.6) (61.2) (56.5) (60.0) (79.5) (64.1) Social acceptance of tax evasion Ineffective penalty & prosecution Provisions Inefficiency in Income tax department 185 (62.5) (46.9) (67.4) (38.0) (54.5) (53.6) (25.0) (20.4) (26.1) (20.0) (25.0) (23.2) (41.7) (34.7) (41.3) (52.0) (50.0) (43.9)

18 Taxpayers perception that Government does not spend tax revenue prudently (18.7) (36.7) (43.5) (28.0) (36.4) (32.5) Low probability of detection (54.2) (51.0) (50.0) (44.0) (45.4) (48.9) Low tax morality (47.9) (32.6) (54.3) (42.0) (36.4) (42.6) Multiple taxes (87.5) (67.3) (63.0) (72.0) (79.5) (73.8) N Note: Percentages are more than 100 because of multiple choices. Location-wise analysis reveals that majority of the respondents irrespective of their locations have identified three basic reasons i.e. Multiple taxes, If caught it could be managed and High tax rates responsible for tax evasion. Besides these, other important reason has been Social acceptance of tax evasion as it has been pointed out by majority of the respondents from locations L 3 (67.4%), L 1 (62.5%) and L 5 (54.5%). It can also be observed that the respondents from locations L 1 (54.2%), L 2 (51.0%) and L 3 (50.0%) have identified Low probability of detection as one of the reasons for tax evasion. Inefficiency in income tax department has been identified as important reason only in two locations L 4 (52.0%) and L 5 (50.0%). Low tax morality has been held as important cause of tax evasion only in one location L 3 (54.3%). Taxpayers perception that Government does not spend tax revenue prudently and Ineffective penalty & prosecution provisions have been considered important reasons for tax evasion only by few respondents in all the locations CORRUPTION Corruption and taxation have always been associated in the history of mankind. It is the biggest hindrance in the way of proper implementation of law. It erodes the confidence of public in tax system. In order to verify the common perception held by the public, the respondents were asked to comment

19 on the statement 'Corruption is prevalent in the income tax system' on a five point scale (ranging from strongly agree to strongly disagree). The responses obtained have been presented in Table 7.16 TABLE 7.16 OPINION OF RESPONDENTS REGARDING PREVALENT CORRUPTION IN THE INCOME TAX SYSTEM Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Strongly agree (10) (40) (20) (42) (24) (27.2) Agree (64) (56) (76) (52) (66) (62.8) Neither agree nor disagree (4) (4) (2) (6) (10) (5.2) Disagree (22) (0) (2) (0) (0) (4.8) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =12, Significant at 5 per cent level of significance Table 7.16 reveals that 90 per cent of the respondents have agreed or strongly agreed with the statement 'Corruption is prevalent in the income tax system'. Only 4.8 per cent have disagreed with this. However, 5.2 per cent have neither agreed nor disagreed with the given statement. None of the respondents have strongly disagreed with this statement. Location-wise analysis indicates that a major proportion of the respondents irrespective of their locations i.e. L 2 & L 3 (96% each), L 4 (94%), L 5 (90%) and L 1 (74%) have agreed or strongly agreed with the given statement. None of the respondents from locations L 2, L 4 and L 5 have disagreed with the statement. Surprisingly, 22 per cent of the respondents from location L 1 and 2 per cent from L 3 have disagreed with this statement. Further, Chi-square test at 5 per cent level of significance reveals 187

20 that significant opinion differences exist among the respondents from various locations with regard to corruption in the income tax system REASONS FOR CORRUPTION 225 respondents, who believed (have agreed or strongly agreed with the opinion) that corruption is prevalent in the income tax system, were further requested to point out various reasons for corruption. Their responses have been presented in Table 7.17 TABLE 7.17 REASONS LISTED BY THE RESPONDENTS FOR CORRUPTION Locations Reasons Total L 1 L 2 L 3 L 4 L 5 Excessive discretionary powers available with income tax authorities (72.9) (72.9) (81.3) (82.9) (73.3) (76.9) Lack of integrity on the part of income tax officials 28 (75.7) 20 (41.7) 30 (62.5) 36 (76.6) 23 (51.1) 137 (60.9) Complicated documentation (13.5) (22.9) (31.3) (36.2) (15.6) (24.4) Lot of harassment to taxpayers (72.9) (71.8) (50.0) (61.7) (55.6) (61.7) Time consuming & costly judicial process (54.0) (54.16) (54.2) (31.9) (68.9) (52.4) Lack of awareness among taxpayers regarding rights available 27 (72.9) 20 (41.7) 31 (64.5) 25 (53.2) 21 (46.7) 124 (55.1) Low pay of income tax employees 1 (2.7) 4 (8.3) 7 (14.6) 3 (6.4) 6 (13.3) 21 (9.3) N Note: Percentages are more than 100 because of multiple choices. Table 7.17 shows that majority of the respondents (76.9%) have specified 'Excessive discretionary powers available with income tax authorities' as the most significant reason for corruption. It is followed by the reasons such as Lot of harassment to taxpayers' (61.7%), 'Lack of integrity on the part of tax officials' (60.9%), 'Lack of awareness regarding rights available with tax payers' (55.1%) and Time consuming and costly judicial process (52.4%). A very low percentage of the respondents feel that 'Complicated documentation' 188

21 (24.4%) and 'Low pay of income tax employees' (9.3%) have been responsible for it. Location-wise analysis reveals that majority of the respondents irrespective of their locations have pointed out that Excessive discretionary powers available with income tax authorities and Lot of harassment to taxpayers have been the significant reasons responsible for corruption. Lack of integrity on the part of income tax officials has also been considered a significant cause by the respondents from all the locations except location L 2. Even, Time consuming & costly judicial process has been indicated as a significant reason for corruption by the respondents from all the locations except location L 4. Further, the respondents from locations L 1 (72.9%), L 3 (64.5%) and L 4 (53.2%) have identified Lack of awareness regarding rights available with taxpayers as a reason for corruption. Further, the reasons Complicated documentation and Low pay of income tax employees have been considered important reasons for corruption only by few respondents irrespective of their locations TAX COMPLIANCE The effectiveness of any law can be measured from its compliance. Surprisingly, 95 per cent of the respondents have pointed out that tax evasion is very high in India (see Table 7.14). Further, 90 per cent of the respondents have pointed out that corruption is prevalent in the Indian tax system (see Table 7.16). Both of these problems result in low tax compliance. Thus, there seems to be an urgent need to curb tax evasion & corruption in income tax system and 189

22 increase tax compliance. Hence, the respondents were asked to suggest measures for improvement in tax compliance. The responses obtained have been exhibited in Table 7.18 TABLE 7.18 MEASURES SUGGESTED BY RESPONDENTS FOR IMPROVING TAX COMPLIANCE Measures Locations L 1 L 2 L 3 L 4 L 5 Total Reduction in tax rates (78) (76) (78) (66) (86) (77) Simplification of tax law (78) (62) (74) (68) (58) (68) Increase in publicity (66) (36) (46) (40) (24) (42) Extensive use of TDS system 42 (84) 31 (62) 40 (80) 30 (60) 30 (60) 173 (69) Implementation of voluntary disclosure scheme 13 (26) 14 (28) 20 (40) 17 (34) 19 (38) 83 (33) Widening of Annual Information Return network Proper processing & use of information available under AIR network Intensive use of coercive recovery (30) 27 (54) (44) 23 (46) (30) 34 (68) (38) 25 (50) (38) 34 (68) (36) 143 (57) (12) (4) (12) (12) (8) (10) N Note: Percentages are more than 100 because of multiple choices. Table 7.18 shows that majority of the respondents (77%) have recommended Reduction in tax rates for improving tax compliance. In addition to this, they have also recommended Extensive use of TDS system (69%), Simplification of tax laws (68%) and Proper processing & use of information available under the Annual Information Return (57%). The moderate proportion of the respondents has also suggested 'Increase in publicity' (42%), Widening of Annual Information Return network (36%) and Implementation of voluntary disclosure scheme (33%). However, a very low percentage of the respondents (10%) have suggested Intensive use of coercive 190

23 recovery in this regard. Further, location-wise analysis indicates that majority of the respondents irrespective of their locations have emphasised on three measures i.e. Reduction in tax rates, Simplifications of tax law and Extensive use of TDS system for improving tax compliance. Moreover, comparatively large number of respondents from locations L 5 (86%) and L 1 (84%) have suggested for Reduction in tax rates and Extensive use of TDS respectively. Further, majority of the respondents from locations L 3 and L 5 (68% each) have suggested Proper processing & use of information available under the Annual Information Return in this respect. Similarly, 66 per cent of the respondents from location L 1 have also suggested Increase in publicity while, a small number of respondents from all the locations has suggested Implementation of voluntary disclosure scheme and Widening of Annual Information Return network in this regard. Only few respondents from all the locations have recommended Intensive use of coercive recovery as a measure for improving tax compliance COMPLETION OF ASSESSMENTS 191 Timely disposal of assessments ensures certainty in tax liability of assesses. If assessments are completed within the time limit then it can further be helpful in raising tax demands and quick refunds to assessees. The respondents were asked to express their views on a five point scale (ranging from strongly agree to strongly disagree) regarding completion of assessments in prescribed time limit. The responses have been summarised in Table 7.19 TABLE 7.19 OPINIONS OF RESPONDENTS REGARDING COMPLETION OF ASSESSMENTS IN PRESCRIBED TIME LIMIT

24 Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Strongly agree (0) (8) (6) (4) (10) (5.6) Agree (32) (54) (68) (54) (44) (50.4) Neither agree nor disagree (8) (18) (12) (14) (14) (13.2) Disagree (60) (18) (14) (28) (24) (28.8) Strongly disagree (0) (2) (0) (0) (8) (2) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. =16, Significant at 5 per cent level of significance 192 Table 7.19 shows that majority of the respondents (56%) have agreed or strongly agreed with the statement Assessments are completed within the prescribed time limit. It is followed by those who disagreed or strongly disagreed with this statement (30.8%). Further, 13.2 per cent of the respondents have been indifferent in this regard. Location-wise analysis reveals that majority of the respondents from locations L 3 (74%), L 2 (62%), L 4 (58%) and L 5 (54%) have agreed or strongly agreed with this statement. Surprisingly, 60 per cent of the respondents from location L 1 have disagreed or strongly disagreed with this statement. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to statement on timely completion of assessments MEASURES FOR TIMELY COMPLETION OF ASSESSMENTS The respondents who disagreed with the above statement (N=77), were further requested to suggest measures in this regard. The responses have been exhibited in Table 7.20

25 TABLE 7.20 SUGGESTIONS BY RESPONDENTS FOR TIMELY COMPLETION OF ASSESSMENTS Suggestions Locations L 1 L 2 L 3 L 4 L 5 Total Increase in proportion of summary assessment 12 (40.0) 4 (40.0) 4 (57.1) 3 (21.4) 7 (43.7) 30 (38.9) Increase in number of assessing officers 20 (66.7) 7 (70.0) 5 (71.4) 12 (85.7) 13 (81.3) 57 (74.0) Help from some outside agency 4 (13.3) 3 (30.0) 4 (57.1) 10 (71.4) 4 (25.0) 25 (32.4) Central processing of assessments (16.7) (60.0) (57.1) (50.0) (56.3) Motivation for e-filing of returns (70.0) (100) (85.7) (78.6) (100) N Note: Percentages are more than 100 because of multiple choices. (40.3) 64 (83.1) Table 7.20 highlights that vast majority of the respondents have suggested Motivation for e-filing of returns (83.1%) and Increase in number of assessing officers (74.0%) for timely completion of assessments. On the other hand, Central processing of assessments, Increase in proportion of summary assessments and Help from some outside agency have been suggested by 40.3 per cent, 38.9 per cent and 32.4 per cent of the respondents respectively. Majority of the respondents from locations L 2 & L 5 (100% each), L 3 (85.7%), L 4 (78.6%) and L 1 (70.0%) have suggested Motivation for e-filing of returns. Besides this, Central processing of assessments has been suggested by majority of the respondents from locations L 3 (57.1%), L 5 (56.3%) and L 4 (50.0%). Help from some outside agency has been recommended by the respondents from locations L 4 (71.4%) and L 3 (57.1%). Further, Increase in proportion of summary assessments has been suggested by the respondents from location L 3 (57.1%) for timely completion of assessments. 193

26 7.18 UNREASONABLE DELAY IN REFUNDS Unreasonable delay in refunds not only creates dissatisfaction among the taxpayers but also results in Government revenue loss in terms of interest to be paid on refunds. The perception of the respondents has been obtained in this regard on a five point scale (ranging from strongly agree to strongly disagree). Their responses have been presented in Table 7.21 Table 7.21 reveals that majority of the respondents (92.8%) have agreed or strongly agreed with the statement There is unreasonable delay in paying refunds by income tax department. It has been followed by those respondents who have disagreed with the statement (5.6%) and have neither agreed nor disagreed (1.6%). None of the respondents have strongly disagreed with this TABLE 7.21 OPINION OF RESPONDENTS REGARDING UNREASONABLE DELAY IN PAYING REFUNDS BY INCOME TAX DEPARTMENT Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Strongly agree (22) (46) (24) (44) (24) (32) Agree (76) (48) (58) (54) (68) (60.8) Neither agree nor disagree (0) (0) (4) (0) (4) (1.6) Disagree (2) (6) (14) (2) (4) (5.6) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d.f. =12, Significant at 5 per cent level of significance statement. Location-wise analysis shows that a vast majority of the respondents from all the location i.e. L 1 & L 4 (98% each), L 2 (94%), L 5 (92%) and L 3 (82%) have agreed or strongly agreed with the given statement. A very low percentage of respondents from all the locations; L 1 & L 4 (2% each), L 5 (4%), 194

27 L 2 (6%) and L 3 (14%) have disagreed with the given statement. So, we can conclude that most of the respondents clearly perceive that there is unreasonable delay in paying refunds by income tax department. Further, Chisquare test at 5 per cent level of significance reveals that significant opinion differences exist among the respondents from various locations with regard to unreasonable delay in paying refunds REASONS FOR UNREASONABLE DELAY OF REFUNDS 232 respondents, who perceived that there has been unseasonable delay in refunds by tax department, were further requested to indicate the reasons for this phenomenon. Their responses have been presented in Table 7.22 TABLE 7.22 PERCEPTION OF TAX PROFESSIONALS REGARDING REASONS FOR UNSEASONABLE DELAY IN REFUNDS Reasons Locations Total L 1 L 2 L 3 L 4 L 5 Increase in number of returns (55.1) (31.9) (51.2) (38.8) (45.7) (44.4) Introduction of annexureless return 3 (6.1) 9 (19.1) 4 (9.8) 15 (30.6) 19 (41.3) 50 (21.6) Improper filing of returns 12 (24.5) 10 (21.3) 7 (17.1) 6 (12.2) 1 (2.2) 36 (15.5) Cumbersome process 7 (14.3) 2 (4.3) 9 (22.0) 12 (24.5) 6 (13.0) 36 (15.5) High TDS rates 32 (65.3) 18(38.3) 19 (46.3) 14 (28.6) 22 (47.8) 105 (45.3) Shortage of staff (89.8) (72.3) (82.9) (65.3) (82.6) (78.4) Inefficient staff (53.1) (48.9) (63.4) (57.1) (54.3) (55.2) Intentional delay to get bribe (53.0) (74.5) (73.2) (79.6) (71.7) (70.3) Time consuming process (14.3) (10.6) (17.1) (24.5) (26.1) (18.5) N Note: Percentages are more than 100 because of multiple choices. 195

28 Table 7.22 shows that Shortage of staff (78.4%), Intentional delay to get bribe (70.3%) and Inefficient staff (55.2%) have been identified as main reasons for delay in refunds. Further, High TDS rates (45.3%) and Increase in number of returns (44.4%) have been given average importance. The rest of the reasons viz. Improper filing of returns (15.5%), Cumbersome process (15.5%) Time consuming process (18.5%) and Introduction of annexure less returns (21.6%) have been held less significant reasons for delay in refunds. Location-wise analysis reveals that majority of the respondents irrespective of their locations have pointed out that Shortage of staff and Intentional delay to get bribe are the two basic reasons responsible for delay in refunds. In addition to these, majority of the respondents from all the locations except L 2 and 48.9 per cent of the respondents from location L 2 have held Inefficient staff responsible for this. Further, Increase in number of returns has been considered important reason by the respondents from locations L 1 (55.1%) and L 3 (51.2%) while High TDS rates has been considered important by the respondents from location L 1 (65.3%). However, Introduction of annexure less return, Improper filing of returns, Cumbersome process and Time consuming process have not been considered important reasons for delay in refunds by the respondents from all the locations COMPUTERISATION AND ADMINISTRATIVE EFFICIENCY OF INCOME TAX DEPARTMENT Computerisation was introduced in Income Tax Department in 1984 on a small scale for managing the increasing volume of workload such as processing of returns. But with passage of time computerisation has been 196

29 introduced in other areas such as data entry, allotment of PAN cards, e- filing of returns, processing of returns, processing of challans, e-payment of tax etc. So, it has affected the efficiency of income tax administration to a large extent. The respondents were asked whether administrative efficiency of Income Tax Department has increased, decreased or not changed after computerisation. Their responses have been presented in Table 7.23 Table 7.23 shows that majority of the respondents (62.8%) have felt that administrative efficiency of Income Tax Department has increased after computerisation. It is followed by those respondents who believe that it has TABLE 7.23 OPINION OF RESPONDENTS REGARDING IMPACT OF COMPUTERISATION ON ADMINISTRATIVE EFFICIENCY OF INCOME TAX DEPARTMENT Opinion Locations L 1 L 2 L 3 L 4 L 5 Total Increased (84) (52) (70) (50) (58) (62.8) Decreased (4) (32) (14) (30) (16) (19.2) No change (12) (16) (16) (20) (26) (18) N (100) (100) (100) (100) (100) (100) Chi-Square value = , d. f. = 8, Significant at 5 per cent level of significance decreased (19.2%). However 18 per cent of the respondents have opined that there has been no change in it. Location-wise analysis shows that a majority of respondents irrespective of their locations L 1 (84%), L 3 (70%), L 5 (58%), L 2 (52%) and L 4 (50%) have opined that administrative efficiency of Income Tax Department has increased after computerisation. However, around 30 per cent of the respondents from locations L 2 and L 4 have opined that administrative efficiency has decreased after computerisation. Further, Chi-square test at 5 per cent level of significance reveals that significant opinion differences exist 197

30 among the respondents from various locations with regard to effect of computerisation on administrative efficiency of Income Tax Department REASONS FOR DECREASE IN EFFICIENCY OF INCOME TAX DEPARTMENT AFTER COMPUTERISATION 48 respondents who felt that administrative efficiency has decreased after computerisation were further requested to specify the reasons for this. Their responses have been summarised in Table 7.24 TABLE 7.24 PERCEPTION OF TAX PROFESSIONALS REGARDING REASONS FOR DECREASE IN EFFICIENCY OF INCOME TAX DEPARTMENT AFTER COMPUTERISATION Reasons Locations L 1 L 2 L 3 L 4 L 5 Total Improper training to manpower (100) (87.5) (85.7) (93.3) (87.5) (89.6) Non availability of proper tax softwares (50.0) (62.5) (42.8) (46.7) (75.0) (56.3) Lack of technological up gradation (100) (75.0) (28.6) (40.0) (75.0) (58.3) Power cuts (50.0) (56.3) (0 ) (20.0) (37.5) (33.3) N Note: Percentages are more than 100 because of multiple choices. Table 7.24 shows that the respondents have pointed out Improper training to manpower (89.6%), Lack of technological up gradation (58.3%) and Non availability of proper tax softwares (56.3%) as main reasons for decrease in efficiency of Income Tax Department after computerisation. Further, Power cuts has been indicated as least significant reason (33.3%). Location-wise analysis highlights that majority of the respondents from all the locations viz. L 1 (100%), L 4 (93.3%), L 2 & L 5 (87.5% each) and L 3 (85.7%) have pointed out that Improper training to man power has been the main 198

31 reason for this decrease in efficiency. Non availability of proper tax softwares and Lack of technological up gradation have been held responsible by majority of the respondents from locations L 2, L 1 and L 5. However, Power cuts has been held significant only in locations L 2 and L REASONS FOR WHICH TAXPAYERS SEEK GUIDANCE OF TAX PROFESSIONALS Taxpayers seek guidance of tax professionals because of certain important reasons. The respondents were asked to specify these reasons. Their responses have been presented in Table 7.25 TABLE 7.25 REASONS FOR WHICH TAXPAYERS SEEK GUIDANCE OF TAX PROFESSIONALS Reasons Locations L 1 L 2 L 3 L 4 L 5 Total Complexity of income tax law (82) (66) (76) (78) (82) (77) Frequent changes in tax law and procedures (76) (84) (70) (78) (76) (77) Non helping attitude of tax department (44) (28) (36) (32) (32) (34) Minimisation of tax burden (86) (72) (74) (76) (70) (76) Avoiding mistakes in tax compliance (52) (62) (58) (50) (54) (55) Low cost of hiring tax advisors (16) (12) (10) (10) (14) (12) N Note: Percentages are more than 100 because of multiple choices. Table 7.25 shows that Complexity of income tax law (77%), Frequent changes in tax law and procedures (77%) have been identified as the main causes for which taxpayers seek guidance of tax professionals. These are followed by Minimisation of tax burden (76%), Avoiding mistakes in tax compliance (55%), Non helping attitude of tax department (34%) and Low 199

32 cost of hiring tax advisors (12%). Location-wise analysis reveals that majority of the respondents irrespective of their locations have pointed out four basic reasons for seeking guidance of tax professionals viz. Complexity of income tax law, Frequent changes in tax law, Minimisation of tax liability and Avoiding mistakes in tax compliance. The respondents from all the locations have considered Non helping attitude of tax department and Low cost of hiring tax advisors as least important reasons for consulting tax professionals PROBLEMS DISCUSSED BY CLIENTS WITH THE TAX PROFESSIONALS Taxpayers are the persons who are really affected by income tax system. Whenever people visit tax professionals they discuss their problems with them formally or informally. So, in order to understand the problems faced by the taxpayers while complying with tax obligations the respondents were asked regarding nature of problems discussed by their clients with them. Their responses have been presented in Table 7.26 TABLE 7.26 PROBLEMS DISCUSSED BY THE CLIENTS WITH TAX PROFESSIONALS Problems Locations L 1 L 2 L 3 L 4 L 5 Total High tax rates (86) (74) (66) (54) (84) (73) Complicated tax law (74) (70) (68) (78) (80) (74) Indifferent attitude of assessing officers (34) (34) (34) (26) (12) (28) Non availability of forms for different purposes (4) (10) (6) (6) (10) (7) Lengthy return forms (32) (46) (50) (54) (70) (50) Lack of transparency in tax administration (56) (54) (48) (26) (48) (46) Difficulty in satisfying assessing officers regarding correctness of (46) (28) (46) (32) (24) (35) information Threats by assessing officers for