The Prime Minister gave a crucial sound-byte on New Year’s eve when he said that there are a miniscule minority of people in our country who have declared income exceeding Rs 10 lakh.
Only 24 lakh people have reported income above Rs 10 lakh but automobile companies have sold over 25 lakh units of cars on an annual basis. Also, there was a big hue and cry about people not being allowed to withdraw more than Rs 24,000 per week on account of demonetisation whereas statistics disclose that a wide majority of people do not earn more than Rs 20,000 per week.
There has been consistent demand for immoveable properties throughout India, especially for those in the four metro cities, but this trend is not reflective of whether the income which is utilized to acquire these properties is net of tax. This tends to indicate an anomaly in income reported vis-à-vis income utilised and tax collection is inversely proportional to income utilised for acquiring the assets.
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So how can the government make people turn in unaccounted income?
While one method is to widen the tax base of the country (carrot approach)—which has received considerable attention of successive governments over the years—another method to get people to comply is increasing penalty for income tax evasion and introducing the provision of arrest in certain cases (for non-filers) which is a (stick approach) for ensuring compliance. A combination of the carrot and stick approach can yield positive balanced results.
Expand tax base
The present tax payer base in the country is minuscule and expansion of this base is critical for several reasons. The following measures would lower the burden on existing tax payers.
– To enhance the tax base and augment tax collection, it is pivotal for the government to focus on non-filers and uncover black money in the economy.
– The IT department plans to widen the tax base by identifying non-filers, using annual information returns, capturing new information sources such as under-reporting of immovable property, etc. It also plans to track advance tax payments by top taxpayers, Tax Deducted at Source (TDS) payments by top deductors and monitor payments by entities covered under minimum alternate tax provisions.
In addition, the proposed dual Goods and Services Tax (GST) is expected to expand the tax base and harmonise the tax systems presently levied at both central and state levels.
The rationale for introduction of presumptive based taxation should also be looked at to capture more number of small businesses and professionals within the tax net and to avoid revenue leakages. Lowering the presumptive taxation rates for digital transactions—a measure announced by the finance minister and expected to be announced / rationalised in the forthcoming budget is a step in the right direction. Now there is a requirement to tighten the screws and it is expected that the Income Tax laws would be made quite strong in the forthcoming Budget.
The writer is executive director, People Advisory Services, EY India.
Views expressed are personal