With direct tax collections rising 7 times over the past decade, it?s easy to conclude all is well with India?s tax machinery?from Rs 83,000 crore in FY03, direct tax collections rose to Rs 5.6 lakh crore in FY13. The reality, however, is quite different. Just to take the number for personal income tax collections that rose from Rs 36,866 crore to Rs 2,01,690 crore in the same period, what matters is that the number of taxpayers rose just 35%?only around 3.5 crore people file tax returns in a country of 120 crore. And the number is heavily skewed towards the better off?98.3% of taxpayers show annual incomes of under R5 lakh and account for just 10% of collections while 0.38% of taxpayers report incomes of over Rs 20 lakh and account for 63% of collections. In other words, there is massive tax evasion in the middle income group.
What is even more important is that while overall tax collections have been stagnant?at 10.3% of GDP in FY13, the tax-to-GDP ratio is similar to that in FY90?the taxman?s aggression has increased manifold, to the extent it has become a problem with existing and potential investors. Transfer pricing adjustments on MNCs, or the amounts the taxman says they are under-reporting their incomes by, have soared from R44,000 crore in FY12 to R70,000 crore in FY13?in cases of MNCs like Microsoft that run contract R&D centres in India, the taxman has even insisted that part of Microsoft?s global income be added to the local centre?s income as part of its global R&D takes place in India. In the case of search and seizures, similarly, while this rose to 3,700 surveys in FY12, the total alleged undisclosed income from such actions was a mere R14,000 crore?surely the taxman didn?t need to conduct surveys to get such a pittance? What puts all of this in perspective is that while direct tax arrears have nearly doubled from R2.5 lakh crore in FY11 to R4.8 lakh crore in FY13, just around a third of all taxman-filed appeals get held up in various courts. The figure is even lower at the level of the tribunals.
Given this, chairman of the Tax Administration Reform Commission Parthasarathi Shome?s task is to minimise the taxman?s aggression while hiking his ability to collect taxes. Which means there have to be less ?searches? and ?scrutiny? and more IT-generated queries?for FY13, tax data showed that while just 14.6 lakh persons declared an income of more than R10 lakh, 52.4 lakh persons invested more than R2 lakh in mutual funds. The notices sent as a result of this got a very good response. Similarly, there has to be tax certainty?the new ?safe harbour? norms, for instance, apply only to mid-sized firms and apply profit norms that are way in excess of the profits firms are actually making. E-filing of both service taxes and increasingly of personal taxes has been a great tool that has helped the taxman harness the power of multiple databases in catching evaders. Finally, Shome has to find ways to disincentivise wild goose chases by the taxman?a claims-collected-to-claims-filed ratio, for instance, would be a good idea.