The blame for the fall in revenue buoyancy since 2007-08 lies not solely with a slowdown in the GDP growth rate, but also with a surge in tax evasion. According to a study by the National Institute of Financial management (NIFM), tax evasion by companies increased sharply from 18.5% of the total tax collection in 2004-05 to 32% in 2010-11.
The study by NIFM on black money, using structural equation modelling, has revealed that tax evasion by companies increased from R15,000 crore in 2004-05 to R95,000 crore in 2010-11.
The reported and projected incomes of the corporates suggests that after 2007-08, the year that preceded the global financial meltdown, the intensity of under-reporting of income has increased sharply. According to NIFM, the gap between estimated and reported income, which was below 20% earlier, crossed 30% in recent years.
The analysis based on the Multiple Indicator Multiple Causes (MIMIC) model has shown that while corporate tax revenue has been increasing at a high rate, the corporate tax buoyancy has been relatively low. (Revenue buoyancy is the ratio of revenue increase to the nominal GDP growth.) Corporate tax mop-up grew to R2,44,725 crore in 2009-10 from R63,562 crore in 2003-04. However, corporate tax buoyancy has seen a decline from 2.63% to 0.73% during the period.
Also, a large number of corporates registered with the ministry of corporate affairs are not yet filing their return of income with the income tax department, which seems to be a serious concern for the tax authority.
The ?revenue forgone? (read the tax concessions/exemptions) seems to be high, and growing. However, the revenue foregone ? up from Rs 34,618 crore in 2005-06 to Rs 72,881 crore in 2009-10 ? has been increasing at a lower rate compared with the growth in corporate tax collection. The total amount of revenue forgone as a percentage of corporate tax collected has fallen from 34% to 29% over the period.
However, the sharp reduction in the revenue forgone as a percentage of corporate tax collected is not accompanied by a similar sharp increase in the effective tax rate (ETR). This clearly indicates that despite the reduction in the amount of revenue forgone, companies have found some other avenues to keep their ETR low, the study has revealed. Revenue forgone in 2005-06 was Rs 34,618 crore, which came down to Rs 72,881 crore in 2009-10.
To estimate corporate tax evasion using the MIMIC model, the institute has quantified causes including presence of public sector units, tax burden and administration, and regulation.
NIFM, based in Faridabad, Haryana, is primarily a training centre for senior government officials dealing in accounting and finance and is an autonomous institution of the finance ministry.