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Impact of tax evasion on SDGs and sovereign rating

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The pandemic and lockdown have had a severe impact on government revenues.

Impact of tax evasion on SDGs and sovereign rating
The pandemic and lockdown have had a severe impact on government revenues. The fiscal deficit is estimated to be in excess of Rs 10.75 lakh crore, 135 percent of the budget estimate. With the Union Budget round the corner, it is thus paramount that every single penny due is collected and available.
Unfortunately, unscrupulous elements have sought to exploit the pandemic and lockdown induced shortages. It was business as usual as far as evaders were concerned. Far too few, be it individuals or corporates, be it personal income tax or corporate tax, be it GST taxes or Customs duties, are paying what is due.
Evasion of taxes is bad. It results in loss of revenue for the Government, hurts genuine taxpayers, funds criminal activity, fuels corruption and damages the integrity of institutions. While these aspects of the pernicious impact of tax evasion are known, The Transnational Alliance to Combat Illicit Trade (TRACIT) a US based think tank, have highlighted some other consequences which have not been debated sufficiently. TRACIT has published studies about the impact of illicit trade on Sustainable Development Goals (SDGs) and on a country’s Sovereign Credit Rating.
The UN Sustainable Development Goals (SDGs) was conceived in 2012 – the objective being to produce a set “universal goals that meet the urgent environmental, political and economic challenges facing the world”.
Thus, the UN 2030 Agenda for Sustainable Development adopted by all member countries including India, has ambitious goals. There are 17 goals – no poverty, zero hunger, good health and wellbeing, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry, innovation, infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice and strong institutions, partnership for the goals.
The TRACIT study has noted the importance of trade as a means of attaining these ambitious goals and conversely the negative impact that illicit trade has in achieving these goals. The study seeks to map the impact of illicit trade on the 17 SDGs and suggests that the macro impact of such evasion runs across all the goals. The study specifically highlights the threat which illicit trade poses to SDG 16 (Peace, Justice and Strong institutions) and SDG 8 (Decent work and Economic Growth) arguing that illicit trade results in corruption, undermines the credibility of institutions, threatens economic growth. Money that can otherwise be used for development not being available.
India having “adopted the SDG framework and aligned its development priorities with Global Goals” has submitted its report, the Voluntary National Review 2020. The Review highlights the progress made by the country towards achieving the SDGs. No mention is made of the lost opportunities – of progress which has been impacted because of shortage of funds caused by evasion.
TRACIT has made another study of the impact of illicit trade on the sovereign rating of a country. The study argues that countries ill-equipped to handle illicit trade would suffer from poor credit worthiness; that illicit trade has a negative impact on the country’s economy and institutions and that this, in turn, impacts the sovereign credit rating.
We have to juxtapose this with the estimate made by Prof. Arun Kumar in his “Understanding the Black Economy and Black Money in India”, (published by Aleph Book Company in 2017) that the figure of the black economy in 2012-2013 was 62 percent of the GDP; he has thereafter extrapolated this for 2016-2017 and arrived at the humongous figure of Rs 92 lakh crore. As the learned Professor has pointed out, this is more than the income generated by agriculture and industry; it is larger than the size of the government (Centre plus states) spending. Calculated on this basis the country’s economy is said to have been losing on an average 5 percent growth.
It can be fair to conclude that the Studies hold good for India; that the economy has been adversely affected because of evasion of taxes. And that the present sovereign ratings given by Standard & Poor’s, Moody’s or Fitch (ranging from BBB negative to Baaa3) would have been very different had some percentage of the estimated quantum of unaccounted money, the black economy, been available for developmental expenditure.
Which brings us to what the Budget can do to address this serious problem. The temptation to raise tax rates to generate revenue should be balanced with the impact any increase of rates has on evasion. While what should be the ‘correct’ rate is always a matter of debate, the fact remains that a higher rate provides the necessary arbitrage to evade. Policies ultimately should strengthen the hand of the enforcement agencies. The fundamental principles of tax policy-fairness, simplicity, equity, enforceability should never be lost sight off.
Amnesty schemes in the hope that all evaders will declare their unaccounted money and the Government can then start with a clean slate has never really worked-the fact that Government has had to repeatedly resort to such schemes is testimony to this. They do not contribute much and are ultimately an insult to the honest, compliant taxpayer. So, hopefully, this Budget will not see the announcement of yet another such scheme. There are better ways to mop revenue.
Enforcement agencies should be aware of the larger context in which they are working. Their task of curbing and detecting tax evasion, thwarting smuggling is much more than the amount they have detected. It has a huge multiplier effect and contributes immensely to the exchequer. And to the country achieving its larger goals. Given the enormous damage tax evaders inflict, they need to be dealt with far more severely than they are.
The Finance Minister has promised a “never before” like Budget. The tax to GDP ratio is currently about 17 – 17.5 percent (after including the Centre and States’ tax revenue). A major step in this direction will be to improve the ratio – so that the Government has more money to meet its SDGs which in effect encompasses all aspects of the economy. And what better way to celebrate the 71st year since becoming a Republic.
—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
Read his other columns here
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