Demonetisation bump over, taxman needs a new plan, quickly

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Published: November 19, 2019 3:42:12 AM

The number of individuals declaring an annual income of over one crore rupees in FY18 was 97,689 according to the latest data; while this is a 20% increase over the number in the previous year, the number is less than a seventh of the total number of crorepatis in the country that Price estimated based on its all-India income survey.

Demonetisation, tax, tax filing, GDP, GDP growth, tax buoyancyIn the case of personal income taxes, buoyancy levels more than doubled to 2.3 in FY17, and are now back to pre-demonetisation levels.

With direct tax collections rising by just 5.2% in the first six months of FY20, buoyancy has probably fallen to levels last seen in the pre-demonetisation days, and just around 40-45% of the 1.7 or 1.8 that was assumed when the budget was formulated just a few months ago; it is true that, by using the wrong base numbers, the budget overestimated the FY20 collections, but a below-unity buoyancy is poor by any yardstick. Part of this, of course, was to be expected since, in years when GDP slows, tax buoyancies fall, but a 2.5% growth in corporate taxes and 8.9% in personal income is very poor when you consider that nominal GDP growth in the first half of the year will probably be around 7.5%. Corporate tax buoyancy was around 0.5 in the run-up to demonetisation, jumped to 1.7 in FY18 (the first full year after demonetisation), and is now back to earlier levels. In the case of personal income taxes, buoyancy levels more than doubled to 2.3 in FY17, and are now back to pre-demonetisation levels.

The latest disaggregated data on tax filings for FY18, and slightly less disaggregated data for FY19, suggest that not much has changed in the year. The number of individuals declaring an annual income of over one crore rupees in FY18 was 97,689 according to the latest data; while this is a 20% increase over the number in the previous year, the number is less than a seventh of the total number of crorepatis in the country that Price estimated based on its all-India income survey. Of course, and a word of caution here for finance minister Nirmala Sitharaman, who increased the cess paid by those earning over one crore rupees in the budget, these individuals accounted for a little over 16% of the tax paid by all individuals in FY18; this is also roughly their share of total taxes paid by individuals in the previous year. So, while the need of the day is to get more rich individuals to come out and declare their incomes, and then pay tax on this, the budget’s higher surcharge could well see the growth in the number of tax-filers in this category slowing dramatically. As it is, the data for FY19 shows a slowdown in the number of individuals filing returns as compared to the previous year; in terms of the number of returns filed—this includes revised returns for previous years—this actually contracted.

As in past years, most of the tax collected—well over 90%—seems to be coming from tax deduction at source, advance tax, and self-assessment. Less than a tenth—8% in FY19—came from the additions made by the taxman after the returns are assessed. At one level, that is a good thing since it shows the system has become more self-policing, but given the level of tax-evasion, this suggests the income tax department is not able to really go after a large number of tax-evaders despite all the information it is getting through, for instance, its Operation Insight, which combines various databases like credit card payments, foreign visits, etc. If the finance minister chooses to cut income tax rates in the budget, this may help increase tax buoyancy, but if the taxman is not able to send notices to tax-evaders, there may not be much of an improvement in tax collections.

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