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Will Arun Jaitley Fight Against Tax Terrorism?

In its manifesto, the BJP was the only party that promised to control the extortionate behaviour of tax officials. Will Arun Jaitley keep that promise?

For a long time now, and specially since 2009 when the current fiscal crisis has taken root, the relationship between India's finance ministers and its revenue collectors has been one of a drug addict and his dope peddler. At the beginning of every year, the addict talks a lot about sticking to the straight and narrow. But he makes unrealistic promises which don't take into account that he has made no real effort to cure his dependence. Then, when the withdrawal symptoms hit towards the end of the financial year, the addict doesn't care what is sacrificed in order to get the hit he needs.

For at least half a decade now, the government of India's revenue department has borne an increasing resemblance to medieval tax collectors, whom the king sends out periodically to pillage the land by whatever means they see fit. And the revenue department has done so with a combination of incompetence and ferocity that would have done any medieval tyrant proud. Will Arun Jaitley try fix this? Or will he too succumb to the easy temptation of just mouthing some homilies about 'a fair and non-adversarial tax administration', which was Chidambaram's annual ritual?

What gives one some hope is that the BJP is the only party that has recognised that this problem even exists. Its manifesto strongly criticised the revenue department's conduct as 'tax terrorism' and promised to fix it. Will Mr. Jaitley be able to walk this talk? Unlike many other measures that he will take, the answer to this will not be known on budget day. Instead, it will only become apparent through the year as the revenue pressures increase and the deficit starts looming.

Much of the problem is one of competence and the accepted institutional behaviour in our tax departments. To a considerable extent, this is a people issue. It requires hard work to genuinely dig out expertly done tax evasion, specially because high-quality tax evaders are willing to pay the price for not being called out. Operationally, it is much easier to meet revenue targets by appropriating revenue from people who run their accounts openly and honestly. Does that mean that one can't expect any reform on this issue in the budget? Perhaps one can.

Certainly, this is the most anticipated budget in years,if not decades. There are all kinds of expectations, some realistic, and others unrealistic. No doubt, there will be surprises. Some realistic expectations will be dashed and perhaps some unrealistic ones fulfilled.

However, as with many of the things that the Narendra Modi government is doing and will do, the big question is whether they will choose to run the current system better, or whether they will (and to what extent) try to fix the system. As we have seen, perhaps the most important large fix that is needed is in direct taxation.

There's no doubt that in the years to come, maintaining a high growth in productive expenditure while keeping the fiscal deficit under control will the most important and yet the most difficult task for the government. The current discussion on fiscal deficit often gets centred around reducing subsidies. However, in the long-term, growth in revenues is bound to become the most important issue. There has been a lot discussion on this in recent weeks, but much of it has followed a predictable route of discussing tax slabs and exemptions and such.

If Mr Jaitley is serious about stopping tax terrorism, then he must eliminate the incentives that make it attractive for taxmen to work in this fashion. Currently, as long as a tax official can generate revenue it counts as his achievement, no matter how extortionate and unfair the collection was. Later, the taxpayer can fight his way through the appeals and courts but that's not the tax collector's problem. In any case, the tax department will appeal all the way to Supreme Court even for the most ridiculous cases.

Mr Jaitley's budget speech will reveal how serious he is about fighting terrorism. The victims--and potential victims--have their fingers crossed.