By D M Deshpande
A narrow tax base has always been a bane of Indian fiscal system. As a result, time and again, governments have resorted to rely more on indirect taxes, no matter even if they are highly regressive.
That is why the reported surge in the numbers of individuals who have declared an income of Rs 1 crore and above should be welcomed.
Between FY14 and FY18, numbers of those filing income tax returns in the country went up by a whopping 80%, outpacing the growth in population by a significant margin.
This certainly means that the rate of compliance has improved in the economy. The official data released recently shows a 68% rise in crorepati tax payers between 2013-14 and 2016-17. While that is good, direct tax collections have not picked up proportionately.
The time series data released by the income tax department shows that between 2013-14 and 2016-17, direct tax collections increased by a CAGR (compounded annual growth rate) of 12.9%.
Now, direct tax collections top Rs10 lakh crore accounting for 53% of the total taxes. That still leaves nearly half the total taxes coming from levy of indirect taxes.
As is well known, indirect taxes are a tax on the poor and are not based on the principle of ‘ability to bear’. Almost all advanced countries and welfare states have a much lower share of indirect taxes in their total tax collections.
The Centre may well attribute improved compliance culture to it’s initiatives such as lightening strike on high value notes in 2016 and later due to introduction of GST.
However, it is difficult to say how much of this increased collections and compliance was due to taxman’s effort of issuing notices, follow up, conducting awareness programs and finally carrying out raids.
Some of these have picked up in an unprecedented manner raising not just a few eyebrows in the power circles.
Whatever the reasons for improvement, the government cannot sit back and relax on it’s laurels.
In fact, a deeper analysis will show that the income tax department has so far, by and large, picked up low hanging fruits and there are tougher nuts to crack going forward.
Cracking down on individual tax evaders is an easier job and that is what precisely the IT department seem to have done.
As always, it is the salaried class which is at the receiving end while the rich amongst the self employed and businesses are going scot free.
According to CBDT data, numbers of individuals filing tax returns has gone up by a massive 84% in the last four years.
In contrast, during the same period increase in respect of firms and companies is just 45 and 31% respectively! Not just this, there are other collateral pieces of statistics that goes to prove the same point.
Two-third of the total taxable income declared came from the individual assesses. No one can believe that barring a few, most other businesses are not earning enough to pay taxes in India. Further, on the basis of declared annual income there are 81, 344 individual crorepatis, while there are only 12,990 firms and 39,573 companies earning an income of one crore and above. How can there be such a large difference? It would only mean that evasion and under declaration of incomes is rampant in businesses.
Proper implementation of GST will provide audit trails and data base which can aid considerably in detecting cases of evasion of direct taxes. The DeMo and re-monetisation exercise too has given vital leads to bring to books tax evaders. There is no evidence, so far at least, that this is being used extensively. It does require higher analytical skills and data gathering and data mining capabilities to succeed than, say, the efforts put in to bring individual evaders to book. In this context, it is important to bring large swathes of unorganised sector in to the fold of formal sector.
While several operational glitches need to be removed, two policy fixes are very essential at this stage. One, to enhance the income limit of where the highest marginal tax rate kicks in. This will incentivise greater compliance and declaration of real incomes. Second, and this demand has been made for quite some time now, to reduce the corporate income tax to at least 20%. Actually, it needs to be lowered to levels less than 20% to bring it on par with Asean nations.
This is the basic tenet of fiscal system; make compliance hassle free; reduce rates; penalise heavily and go after evaders relentlessly. By this the cost of non-compliance will be much, much higher than the cost of compliance. This will make more people to pay up and pay according to incomes earned during the year.
