Expanding tax base should be taken seriously

This is a continuation from last week. There are personal opinions to what many have undertaken already to draw up informed accounts of what could be considered necessary for the expansion of our tax and taxpayers base.

The broadening of the tax base and greater compliance could boost tax collections, even while the overall tax rate could fall – for resource mobilization and economic growth. Therefore, further to the general observation in the last article, these are high level summarized specific recommendations:

On increasing the number of taxpayers

There is a gap in the number of corporate tax payers registered with the TRA vis-à-vis the number of working companies registered with the Registrar of Companies, even though most of them are legally required to file returns mandatorily. The revenue authority should pursue this lead to identify corporates that are registered but are not filling returns.

As we noted last week, 2.75 million have a TIN among us and out of these about 300,000 file income tax returns, i.e. about 89 per cent of registered taxpayers are not filing returns. In here, a mechanism needs to be put in place to ensure the filing of returns by all registered taxpayers. The revenue authority could investigate and carry out a robust analysis on why the percentage of returns filed is so low compared to the number of registrations.

Furthermore, we know that the tax base is not commensurate with the growth in both corporate and individual incomes especially in recent past. An effective mechanism for collecting information from varied sources should be put in place to identify potential taxpayers and bring them into the tax net and broadening the tax base. The compliance system could be made simple and more user friendly to encourage voluntary compliance, thereby broadening the tax base.

On withholding Tax

The beauty about withholding tax (WHT) is that it leaves an audit trail that acts as a deterrent to tax evasion and in early collection of tax as soon as a transaction takes place; it is also a non-intrusive method of expanding the base. Therefore, regular monitoring of tax deduction transactions therefore could be made and compared with the tax return data to identify whether deductees do file tax returns.

It would be ideal if WHT deductors would file the WHT returns on time, each quarter and must include the details of name of the deductees, their TIN and amount of transaction.

WHT coverage could be expanded to capture more and more transactions, especially those that involve large amounts of cash but remain outside the tax net.

It is however important to note that the taxpayer base may not necessarily increase merely by introduction of WHT unless deductees and deductors file correct returns. To ensure that correct returns are filed, WHT needs to be supplemented by enhanced enforcement methods.

On the cash economy

In my opinion, the cash economy is a major problem in our economic system as large-scale transactions reportedly take place in cash, especially in land dealings, the construction sector, etc. In this aspect, a non-intrusive verification system could be designed so that more cases of capital gains liability are detected and taxed.

Certain measures could also be put in place to discourage cash transactions. For example, local authorities and the revenue authority could be encouraged to bridge the gap between the tax computation rates that is used for property valuation for tax imposition, and the market value of properties (even allowing for a lower property tax rate) and increase the digital footprint of transactions.

Coupled with this, there is also a need to develop better assessment of the “underground economy” both in terms of its size and the economic behavioral factors that motivate the players in that economy. There is no recent study that I have come across on the issue, and if this is generally the case, there is an urgent need to promote research which is Knowledge, Analysis and Intelligence-oriented in this area. That would provide much needed insight into the functioning of the “black economy” and how to harness it with appropriate revenue yielding administrative measures.

Meanwhile, there is no robust instrument at present that captures details of bank accounts/transactions, as they relate to tax payments. The availability of such information could help the revenue authority in widen its information base on the use of black money.

On presumptive taxation

This is the particular area that in recent years has played a major role in enhancing the widening of tax and taxpayers base. However, there is still a large number of individuals in businesses, trade, services and professions, (especially in the informal sector and sectors where large scale transactions take place in cash) who are outside the tax net. Therefore, the presumptive income estimation scheme should further be reviewed based on appropriate analysis and its scope be enlarged with the view of attracting more into the tax net.

Many small businesses are still in the informal economy and remain untaxed. For these groups, in addition to the ongoing efforts following the President’s directive, the tax administration could design, promote, and establish simple, optional presumptive tax schemes, including those based on a compounding (turnover) basis, for example in the service tax that are below a threshold.

Since there is still some scope for presumptive taxation in the Finance Act, currently applicable to only some business sectors with a turnover below a threshold limit, data mining remains crucial for analysis-based strategies to examine if its scope should be expanded.

However, the presumptive taxation scheme should always be backed by taxpayer education programs to bring taxpayers up to the point at which they can enter the regular tax system. The revenue authority has in recent years increased the visibility of tax education and awareness programmes; this should continuously be an important goal of the presumptive scheme. To be continued next week.