Rajul Awasthi, IFC-World Bank’s senior private sector development specialist in Washington, remembers a workshop in Bhagalpur, Bihar, two years ago where he was speaking to a hall of about 100 people on tax compliance. At the end of the workshop four people walked up to him. Going by their clothes and manner Awasthi figured they were small merchants. “One of them said, ‘we are very scared to go to the offices though we want to be part of the scheme’,” he says. “They said they didn’t want to do business like thieves.”
What they were referring to was the sales tax system that existed in Bihar, as in many other states.
Much has changed since 2009 when Bihar introduced a flat-tax scheme for small businessmen. The scheme did away with quarterly filings with the tax department and scrutiny by officials, instead accepting the businessmen’s assessment of their business in good faith. In short, a small businessman did not have to meet a tax official on any occasion. Awasthi, who was one of the key advisors to the state government, says many people do not pay tax simply because the compliance cost was too high.
Experience worldwide and now in India shows that an easy way to improve tax payments is to reduce the cost of compliance. Many Indian states such as Kerala, Gujarat and Maharashtra have improved tax collections by simply making it easier for people to pay their taxes. The commercial tax reform project in Bihar, which borrows elements from good practices in other states, proves that even regions that are far behind in economic activity can scale up their revenues with some simple measures, especially for small taxpayers. Some of these lessons are finding their way into the national Goods and Services Tax regime being designed by an empowered committee chaired by Sushil Kumar Modi, Bihar’s finance minister.
Only 149 businessmen in Bihar filed tax returns electronically in 2009 when the project started. In February 2013, 78,000 businesses filed returns online. Value added tax grew 29 percent in fiscal year 2013, says Modi. The state ended the year with a total tax revenue of Rs 16,509 crore compared to just Rs 3,561 crore seven years ago.
Sitting in the first class compartment of the speeding Patna-bound Rajdhani Express, Delhi-based businessman RK Gupta is carefully filling up a ‘C’ form on his laptop. The ‘C’ form is a mandatory filing made by businessmen who have inter-state trade in India. Gupta imports polymer bags to Bihar from his factory near Delhi. Earlier, a businessman in Bihar (it is still the case in many states) had to physically file the form in triplicate at the sales tax office and wait for the officials to issue an acknowledgement which had to be shown at the checkpoints on borders and verified by tax officials. The form would have a declaration of the goods and their value. Now Gupta can fill it online and get a token number which his trucker can quote at the state border where tax officials look it up online. Officials at the checkpoint have also been asked to take the declaration of value in good faith and not harass the truckers.
Modi, who is also the deputy chief minister and leader of the Bharatiya Janata Party which rules the state in alliance with Nitish Kumar’s JD(U), says, “Businessmen were filing the documents earlier too. But there were so many documents at different places that it was very difficult to reconcile. Now I have all the information online and I can easily check if the goods declared tally with those sold in the state.” Besides, Bihar has rationalised tax rates of about 150 items with its neighbours. That takes away the tax arbitrage, eliminating the incentive to smuggle goods.
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(This story appears in the 03 May, 2013 issue of Forbes India. To visit our Archives, click here.)
if flat tax model can work for East European countries like estonia, serbia, russia etc it can surely work in India and the same has been proved by the national success story of bihar.on May 23, 2015
Initiative taking and hard working business class faces worst type of apathy of govt. machinery and indian society.on May 2, 2013