India’s tax story has been a case of ‘missing taxpayers’ for quite some time. Despite the continued stress on expanding the tax base, especially income tax, very little has been achieved in terms of increasing the number of taxpayers though tax collections have grown considerably (see chart).
Clearly, the increase in tax collection has camouflaged the failure of the taxman (government) to add new taxpayers but most of the ills plaguing the tax system in the country have remained in the exclusive domain of the tax departments because of the reluctance to share data.
The Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome, in its third report, has succeeded in digging out critical data from the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) to analyse the issues adversely impacting the growth of taxpayers and has also suggested remedies.
Though some of the remedies prescribed by TARC such as bringing back the fringe benefit tax (FBT) or the banking cash transaction tax (BCTT) to expand the tax base have been unpopular in the past and could have been left out—Shome’s point is that these are bitter pills required to fight corruption—the report presents a comprehensive profile of the tax system in the country and can help finance minister Arun Jaitley in deciding the tax changes to be brought in the next budget in February.
If he agrees with the TARC calculations, his immediate priority will be to increase the number of income-tax payers to 6 crore from the current 3.5 crore. Should India be having only 3.3% of its 120 crore strong population as income-tax payers when it is as high as 39% in Singapore, 46% in the US, and 75% in New Zealand?
TARC has calculated that the potential income-tax payer base now is about double the figure the government has at present.
The facts emerging from the TARC study clearly point to the target areas. If there is a big gap between the number of companies registered with the registrar of companies and those filing income-tax returns, there is certainly a case for matching the two to find out why is it so.
Then, only 33% of registered persons under service tax filed returns in FY13 and over 50% of registered central excise taxpayers don’t file returns.
The basic question posed by TARC is: Why is the number of taxpayers not growing the way the income has grown in the country?
In case of personal income tax, the problem lies in the tax structure that allows a plethora of exemptions and the maximum marginal rate kicking in too early; the 30% rate is applicable for income above R10 lakh. Just 1.3% people with income over R20 lakh paying 63% of total income tax in FY12 and 90% of the taxpayers showing income below R5 lakh tells the whole story. The situation is more or less similar for corporate tax also.
Indeed, you don’t need a maven to find out what has to be done. TARC should have avoided suggesting too many specific measures to remedy the situation but it has diagnosed the ailments correctly and the policymakers would do well to keep its basic prescription in mind.
“The focus has to be on bringing in new taxpayers, rather than putting a heavier burden on payers who are already in the tax net by targeting sectors that are currently untaxed, especially the informal/unorganised sectors. There also has to be a comprehensive review of exemptions, incentives, etc, with a view to rationalising them, which may require legislative changes,” the commission has suggested.
If this is the roadmap that needs to be followed, then why not revive the original Direct Taxes Code (DTC) of 2009 which was subsequently altered by the UPA government to accommodate changes that severely diluted the goals it had to achieve—lower tax rates but no exemptions.
In personal income tax, it proposed doing away with deductions including those on investments in life insurance, provident funds and interest paid on housing loans; and tax annual income of R1.6 lakh to R10 lakh at 10%, R10 lakh to R25 lakh at 20%, and income above R25 lakh at 30%. In the case of companies, the 2009 draft code talked about taxing business income at 25% and impose MAT at 2% on the asset of the companies, tax dividend distribution of the domestic companies at 15% and garner additional branch profit tax of 15% from the foreign companies, with no tax exemption?
The DTC Bill, 2010—the current tax structure reflects it to a large extent—however, proposed 10% rate for R2 lakh to R5 lakh income bracket, 20% for R5 lakh to R10 lakh annual income, and 30% for income above R10 lakh, and also the continuance of tax exemptions. It fixed corporate income-tax rate at 30%, MAT at 20%, and retained several tax exemptions as well.
The end result has been a loss of direction in simplifying and rationalising the direct tax provisions to suit the changing economic realities.
There is no point experimenting with more half-measures now—some of the measures proposed by the DTC have already been accommodated in bits and pieces in the Income Tax Act—a better idea would be to consider bringing the original DTC back to ensure ‘lower rates with bare minimum exemptions’ to make it acceptable and workable.
Of course, this will help in encouraging people to pay their taxes but the end result in enhancing the tax base will also depend on how fast the tax departments equip themselves with new tools to tackle tax evaders. The progress, sadly, has been very slow and sketchy here.