Relevance: GS Paper III (Indian Economy)
Theme of the article
The number of tax returns filed has gone up but collections have not shown a commensurate increase.
Why has this article cropped up?
The Central Board of Direct Taxes has released the latest data on income tax collections.
Important data about taxation
- The number of taxpayers has increased drastically over the last four years.
- The number of tax returns filed has surged to 6.85 crore in FY 2017-18, an 80% growth since FY 2013-14.
- Also, the number of taxpayers reporting income greater than ₹1 crore has reached 1,40,139, an increase of 60% between assessment year (AY) 2014-15 and 2017-18.
- However, the tax collections have not shown commensurate increase. Collections have grown at a decent compound rate of about 13% per annum.
- More surprisingly, the average income reported by rich Indians (those in the highest tax slab) has decreased.
- In contrast, relatively low income groups are paying a larger proportion of the tax collected.
- Apparently, a number of high-income individuals (HIIs) grossly under-report their income.
- The tax base has not deepened among professionals such as lawyers, doctors, accountants and those running private educational institutes, who continue to under-report their income.
- Tax avoidance/ evasion by companies also remains an area of serious concern.
- The problem of under-reporting is serious with professional and the other service sector entities, which account for more than one-third of all corporates. As a consequence, the share of direct taxes in the total tax collection has remained low.
Govt’s proactive step towards taxation
- The tax collection figures for this year look better. Some of the apparent improvements will be due to cooking of the books by companies, facilitated by schemes like the Presumptive Taxation s Scheme. This allows an assessee to take full benefit of past evasion and escape without scrutiny, simply by paying a turnover tax.
- By increasing the threshold from ₹1 crore to ₹2 crore, the government has made the scheme even more attractive.
- Things are expected to improve with proper implementation of the Goods and Services Tax (GST).
Reforms in tax law needed
- The extant tax law does not require filing of returns if the income is below the taxable threshold (₹2.5 lakh). This means that many professionals who can easily manipulate their accounts never appear on the radar of the taxman. The law should mandate filing of returns by all professionals and proprietorship businesses regardless of their profit.
- There is also a case for the wealth tax. Compared to income, the wealth level is harder to manipulate; therefore, the tax is harder to evade. The tax provisions are widely misused by corporates by claiming bogus expenses, to artificially reduce their profit and hence their tax liability.
- A large number of companies showing negligible or no profit points to a continued prevalence of shell companies and other dubious structures which require systematic investigation.
- The numerous tax exemptions also come in handy for tax avoidance. Big corporates benefit more from these exemptions. Consequently, smaller companies face a higher effective tax rate compared to larger corporates. This makes the tax regime regressive.
- There is also a need to enhance the deterrence power of the law, which depends on the likelihood of punishing tax evaders along with imposing a fine.
- At present, the Income Tax Department has a very poor win rate before the appellate tribunal and the higher judiciary. As a result, the law does not bite enough to hurt the tax offender. The odds of punishing the offenders can be increased by integrating the GST, the income tax and the Ministry of Corporate Affairs’ databases.
Conclusion
The above measures will go a long way in deepening the tax base among high-income groups and professionals.
