With the number of tax returns filed electronically, both for personal as well as corporate taxes, rising by 22% in FY17, the natural tendency is to assume there has been an equally high growth in tax collections, and that much of the increase has been due to demonetisation. Both assumptions are incorrect. The increase in e-filing is part of the tax department’s attempt to digitise the system, and have been much higher in previous years. So, these grew 38% in FY14 and by 26% in FY16. Indeed, even after this pace of digitisation, the proportion of returns that are e-filed is up from 58% in FY13 to just 67% in FY16 if you include people who don’t file returns but are subject to TDS—ultimately, the aim has to be to get them to also file returns, and electronically. Extending this is critical since, it is only when returns are filed electronically that they can be processed in the same manner—all queries will be addressed via email, and with a clear electronic trail, to ensure transparency in the process.
What is worrying is that, at the level of total direct tax collections, while the number of taxpayers has risen by 73% between FY13 and FY16 and the number of e-filers has more than doubled, tax collections were up by only 33%. In the case of personal income tax collections, the numbers are slightly better at 46%, but are quite minuscule given the country’s wealth—when you remove the amount collected through various amnesty schemes, the growth gets reduced considerably. Just how few people are paying personal income taxes can be judged from the fact that, in FY15, of the 3.5 crore persons who filed their returns—in a population of 131 crore—just 1.9 crore paid any tax; the rest either said their incomes were below the threshold or used business losses to offset incomes. In a country where two crore persons flew abroad for either business or tourism in 2015, just 1.6 lakh declared an income of over `50 lakh in FY16.
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All of this means the taxman really needs to get his act together. When, after demonetisation, the taxman got a lot of data on cash deposits, one assumed this was the big breakthrough. So, for instance, the taxman found there were 1.5 lakh bank accounts—this includes both individuals as well as companies—where Rs 3.3 crore of cash was deposited on average. Queries were raised in 18 lakh cases where over Rs 4.2 lakh crore was deposited—and around 9.5 lakh account-holders have filed their replies. The fact that, despite this, very small disclosures have been made in the post-demonetisation PMGKY amnesty scheme means that most feel the accounts created by their accountants will stand scrutiny. All of which means the taxman has to get a lot more savvy. For one, complete profiles need to be built of individuals, mapping their incomes with expenditure such as that on cars, gold, property, credit cards, etc—if the Supreme Court okays Aadhaar-seeding of PAN cards, this will make such matching easier, though enough safeguards have to be put in place to prevent abuse. Equally, use of big data is important to profile high-risk individuals for greater scrutiny in the department’s Project Insight—the taxman is said to have identified more than 60,000 persons for more detailed investigation including 6,000 high-value property purchases and 6,600 cases of overseas remittances. Tax terrorism cannot be condoned, but taxpayer terrorism is a reality that also has to be recognised.