Prime minister Narendra Modi’s target of doubling the number of taxpayers—both those who file their annual returns and those that only get TDS deducted—to 10 crore is a tough ask due to the large number of exemptions, but the latest income tax data released for FY14 shows good progress. While the number of those filing income taxes grew just around 6% between FY07 and FY11, it grew a whopping 25% between FY12 and FY14—as a result, over 7.8 million more people were added to the direct tax net between these two years, and over 7.6 million of these were individuals. Getting more individuals to file returns is critical for higher tax collections since salaried income accounts for around 36% of all income shown—close to R9.8 lakh crore of salary income was declared in FY14 of the total of R26.9 lakh crore—and over 42% of all business income is also that declared by individuals as part of their tax returns. As a result, between FY12 and FY14, while salary incomes rose a whopping 56.4%, business incomes—of individuals, corporates and others—rose a mere 8.8%. With over 3.9 crore income-tax filers and another 1.3 crore paying TDS, India now has 5.2 crore taxpayers.
The data offers other valuable insights. With just around 3% of all incomes declared coming from capital gains, it is an open question as to whether the taxman should spend much time trying to get after such taxes. The data also busts the myth that the rich don’t pay taxes—while just 6.8% of the number of returns filed in FY14 showed an annual income of over R10 lakh, over 55% of the total taxes collected were from this group. More important, however, is what it tells you about tax dodging and who is likely to be doing it. A total of 18 lakh persons declared their incomes as between R10-20 lakh in FY14, and 8.5 lakh persons declared their annual incomes to be more than R20 lakh in FY14. According to analysis done by economist Surjit Bhalla using FY12 data, compliance ratios—number of taxpayers divided by number of earners in each income tax bracket—are as high as 45% for those earning more than R20 lakh a year versus just 20% for those earning between R10-20 lakh.
The good news here is that the number of returns has increased in the R10-15 lakh and R15-20 lakh income brackets—thanks to a 52% increase in the number of returns, while those in the R10-20 lakh bracket paid 7.6% of total tax collections in FY12, this rose to 9.2% in FY14. More work is clearly required to get more people in this tax bracket, and ensuring the top tax rate of 30% doesn’t kick in as early as R10 lakh will help. The fact that the taxman is collecting a lot more information on expenditure and investments, of course, is a big reason for tax filing rising since people know it is becoming increasingly difficult to hide from the taxman—the great success of the Income Declaration Scheme, of course, is testimony to this; and once GST comes into operations, avoiding even direct taxes will become that much more difficult since the taxman will have a much clearer picture of incomes generated in various areas.