Income tax returns (ITR) filing: Should all citizens be profiled? What must be done fast

The night of November 8, 2016, will be etched on the minds of the average Indians for a long time.

Income tax returns (ITR) filing: Should all citizens be profiled? What must be done fast
The night of November 8, 2016, will be etched on the minds of the average Indians for a long time.

– Rajiva Ranjan Singh

The night of November 8, 2016, will be etched on the minds of the average Indians for a long time. After all, it isn’t everyday that most of the cash in your pocket, in your homes, becomes meaningless scraps of paper overnight. A lot has already been written about whether the move was correct, well-planned or executed properly, and if it was really necessary. However, we try to bring into focus how the data that has been collected can be put to use. There is no denying that demonetisation put a lot of us through considerable hardship. Long queues, ATMs and banks running out of cash, reports of lives lost resulted in chaos in the weeks that followed. The primary targets of demonetization were black money, fake currency, corruption and combating terrorism.

In its Annual Report released in August 2017, RBI showed that 99% of these scrapped notes had found their way back to the banks. This led to widespread criticism. While the debate continues, one factor that could help in reasonably deciding it is the extent to which the taxpayer base in the country has widened based on the information gathered during this exercise. India has seen such a measure twice earlier—1946 and 1978. Both times, the action taken by those governments did not achieve the desired results. With respect to demonetization of 1946, the first Governor of RBI, Sir CD Deshmukh, summed up: “It was really not a revolutionary measure and even its purpose as a minatory and punitive gesture towards black-marketing was not effectively served. There was no foolproof administrative method by which a particular note brought by an individual could be proved as the life-savings of the hard-working man who presented it or established as the sordid gains of a black-marketer.”

The RBI Governor during demonetisation of 1978 recalled in his memoir that “such an exercise seldom produces striking results. Most people who accept illegal gratification or are otherwise the recipients of black money do not keep their ill-gotten earnings in the form of notes tucked away in suitcases or pillowcases … And in any case, even those who are caught napping—or waiting—will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought. But the gesture had to be made, and produced much work and little gain.” Simply removing higher denomination notes from circulation will never be sufficient to tackle black economy. The wealth of information that is received by the government (which is linked to some identification in each case this time), specifically the I-T Department, will have to be analysed systematically so that potential taxpayers can be identified and the uneven burden of paying taxes, which is prevalent, rectified to an extent.

The existence of a large black or unaccounted economy is one of the major reasons for a low taxpayer base as well as under-reporting of income. On a comparison for calendar year 2015 (for which comparative data is available for other countries; India’s data is for financial year 2015-16), we see that only 3.3% Indian population filed returns, as against 84.1% in Canada, 46.2% in the US, and 47.1% in the UK. While it is true that these are developed countries, but the difference is appalling. This situation holds true even on a comparison for the same year with South Africa (33.4%) and Brazil (13.9%). Over the years, there has been higher growth in direct tax collections compared to the number of taxpayers. The potential taxpayers hidden within the categories of salaried personnel, MSME, professionals and companies is huge when we compare data on their numbers, available with government agencies, and the number of returns that are filed with the department. Even when we bear in mind that it is not mandatory for individual taxpayers whose taxable salary is below the exemption limit to file returns, the gap in the data still appears considerable.

For instance, an estimated 4.2 crore people are engaged in the organised sector (salaried taxpayers) and the number of returns filed are only 1.74 crore. Similarly, of 5.81 crore MSME and professionals and 16.13 lakh registered companies, only 2.64 crore MSME and professionals and 8.01 lakh registered companies filed returns in 2016-17. The minimum investment that classifies an enterprise as a ‘micro’ enterprise is Rs 10 lakh case of professionals and Rs 20 lakh for manufacturing sector. A person who makes such an investment would obviously expect returns in tandem with it. To close this gap in the database, the government could consider making filing of income tax returns by all such eligible persons compulsory, whether their salary or other income is above the exemption limit or not.

In his Budget speech this year, the FM alluded to the culture of non-compliance that exists in the country. To change this, the I-T Department has its work cut out. Over time, there are a number of measures that it has taken which have borne results. However, now is when it needs to fire all cylinders, albeit in a non-intrusive and tax-friendly manner. A 360-degree profiling of all citizens should be considered based on all the data that has been received since November 2016, along with historical data and third-party information. The department must bear in mind the idea of ‘customer focus’ as elucidated in the TARC report, and should not unnecessarily burden citizens with notices without carrying out proper analysis of data.

Since the department has enough time for taking action (six years), it should avoid giving pin-pricks so that citizens feel assured they are not being targeted without reason. In recent times, widening of taxpayer base has been recognised as an important item of agenda by the department itself, and it should use demonetisation of 2016 (with wherewithal in the form of technology and data) to provide some respite to that small proportion of citizens who pay taxes.

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