The number of income taxpayers in India has suddenly started looking impressive with revenue secretary Hasmukh Adhia disclosing that the total number is around 6 crore, the number that the Tax Administration Reform Commission said India should have a little over a year ago. The jump, of course, is not as high as you would imagine—what the revenue secretary has done is to take the 3.5-4 crore who are filing their tax returns and added to this the 1.8-2 crore people who have their TDS cut but don’t file returns; technically, they too are taxpayers. In a country as poor as India, that is a reasonable number of taxpayers—indeed, it is unlikely that India has more than 8-9 crore people who earn more than Rs 2.5 lakh a year, the threshold at which taxation begins.
In which case, while the tax department has to be congratulated for getting more people into the tax net, it now needs to get them to pay their actual taxes—in other words, it has got the breadth and now needs the depth. The 1.8-2 crore people paying taxes through TDS are prospective tax-filers who need to be made to file annual returns so that their actual incomes can be ascertained. The way to get to know their actual incomes is to keep doing what the taxman is beginning to do better: mine the data collected on spending including on purchases of various goods via debit and credit cards and map this to the tax returns filed as well as the TDS amounts deposited against various people’s names.
The other issue that needs to be fixed is that regarding tax avoidance by the middle classes who are not salaried, but are self-employed and do not get their tax cut by their employers. Thanks to the highest rate of 30% kicking in at a low level of Rs 10 lakh, and 20% for income between Rs 5 lakh and Rs 10 lakh, the latest figures provided by the finance ministry to the parliamentary standing committee on finance suggest that taxpayers may be suppressing their incomes to be able to squeeze into the lower tax bracket. Which is why, with 75% of taxpayers claiming to be in the Rs 2.5-5 lakh tax bracket, just 12% of the income tax the government collects is from this bracket—the bulk of the tax collected today comes from those having incomes over Rs 20 lakh. So, while the taxman has to work on achieving the target of getting 15% more taxpayers every year, the real goal has to be to get them to declare their real incomes. One way would be to lower the tax rates to more reasonable levels and to ensure the top bracket kicks in much later than the current Rs 10 lakh—finance minister Arun Jaitley would do well to make a beginning on February 29.