Tax evasion is the biggest financial crime hindering the country’s progress. Taxes are sources of revenue for development and welfare activities. Hence, paying tax properly is one of the most important duties of a citizen. Vice versa, collecting tax properly is an important responsibility of the government.
Unscientific tax structures in the country encourage widespread tax evasion directly and indirectly. It is unscientific taxation that encourages merchants to evade tax and make profit and customers to save money by not paying it. Today, competition in all sectors is between those who pay tax properly and those who do illegal business by evading tax.
The government loses crores of rupees due to tax evasion in jewellery business. According to official calculation, India imports about 5,000 tonnes of gold a year. Of these, only 900 tonnes are included in official import data. The remaining 4,100 tonnes come through illegal routes. As a result, the country loses Rs 1,21,770 crore in customs duty and Rs 6,642 crore in income tax.
Let us take the example of Kerala. VAT imposed on jewellery business in Kerala is 5 per cent, which is four times more compared with other states. However, the law states that merchants following compounding system voluntarily need to collect only 1.15-1.25 per cent tax from customers. This might look attractive as an alternative method. However, there is a trap in it.
Merchants collecting tax at a lower rate from customers as per the compounding system have to pay the government 115-125 per cent of the tax paid in the previous year. This tax system is based on the premise that sales increase annually. The huge difference between the tax collected from customers and the tax paid to the government will naturally lead these establishments to a loss. Its final outcome is that a considerable percentage of businesses turn to illegal means.
As a result of the tax structure in Kerala, 80 per cent of trading has turned illegal. As per official studies, annual turnover of gold traders in Kerala is Rs 1,13,400 crore. Of this, only Rs 34,020 crore is included in official data. The remaining Rs 79,380 crore business takes place in the illegal sector. No one is noticing the resulting loss to the government.
Establishments doing business legally pay about Rs 3,200 for one sovereign in different taxes to the government. However, merchants not following law do not have this liability. This money goes to the pockets of different mafias operating in this sector.
Though the seriousness of this matter was brought to the attention of the state government many times, the government and officials have not been willing to heed the concerns of the people operating legally in this field. We had given petitions many times stating that we were willing to link data to the tax department’s online system for transparency. But there was no proactive response from the government. Instead, without considering fall in prices and slump in sales, each year compounding rates are being increased.
To encourage establishments that do business without showing it in data to pay tax properly, tax structure has to be reformed timely. Tax collection must be made efficient by implementing e-governance. Such measures can be modelled on Singapore.
(The writer is the chairman of Malabar Group of Companies)