For the UPA government, it would also be politically gainful to be seen as freeing millions of people from the tax bracket.
Mind you, of the 1.24 billion Indians, just 32.4 million pay tax on income. That means not even three persons among 100 pay income tax. And, according to information furnished by the finance ministry to the parliamentary standing committee, of this 32.4 million taxpayers, some 400,000 reporting taxable income higher than Rs 20 lakh paid over Rs 93,000 crore as income tax in 2011-12. In other words, 1.3% of the taxpayer pool accounted for 63% of the total personal income tax (PIT) collection of Rs 1.5 lakh crore in the year (as per the Budget documents, PIT collection in 2011-12 stood at Rs 1.7 lakh crore, inclusive of recovery of arrears, etc.) Persons with taxable incomes up to Rs 5 lakh were 28 million in number or 89% of the total taxpayer base, but contributed just Rs 15,000 crore or 10% of the governments PIT receipts in 2011-12. What gives more credence to the economists proposal is that PIT receipts, conventionally the bigger direct tax item for the central government, have in recent years of economic prosperity ceded that space to corporate tax, and now lag by a huge margin. True, moderate tax rates encourage compliance, yet it would be reasonable to expect those with very high income and wealth to pay at a slightly higher rate.
There is scope for raising the exemption limit to Rs 5 lakh from Rs 2 lakh now. This would leave leave 29.7 million or 90% of existing taxpayers out of the tax net. This would have only a tolerable impact on the governments revenue kitty, even though raising the exemption limit would also need a restructuring of the tax slabs.
Currently, the highest income tax rate of 30% is applied on taxable income of Rs 10 lakh-plus. For sure, a hike in the rate to 40% or so for those with an income above Rs 1 crore (a category that would indeed classify as affluent) would substantially bolster revenue productivity.
Also consider that by the governments own admission the income reporting by individuals, especially those with higher levels of income, is less than honest. As stated by revenue secretary Sumit Bose last month in a release given out to the media: In Assessment Year 2012-13, only 14,62,488 assessees (salaried persons, HUF, professionals, firms, companies and transporters & retainers) have filed their returns disclosing a taxable income of over Rs. 10 lakhs. Any fair minded person will agree that this is a gross under-statement. According to Boses statement, in the relevant year, 1,600,746 persons made payments of Rs 2 lakh or more against their credit cards; 1,191,037 persons decided to purchase or sell house property worth Rs 30 lakh or more; 5,242,114 persons acquired mutual funds of Rs 2 lakh or more, bonds or debentures of Rs 5 lakh or more, shares issued by a company of Rs1 lakh or more, bonds issued by the Reserve Bank of India of Rs 5 lakh or more, and 3,383,276 persons made cash deposits aggregating Rs 10 lakh or more in their savings bank accounts.