Tax collections are woefully short, implement DTC
It is not clear why the tax department put out a press statement on how a record 49,29,121 tax returns were filed on August 31, the last day for filing returns for FY19. Certainly, it is true that a 42% jump in the number of returns filed in the last five days of August as compared to the same month last year is impressive. But, the April-August performance is less impressive and just 4% more returns were filed so far in the financial year as compared to the same period last year.
What really matters is the amount of tax collected, not the number of returns filed. And, while this is not the first time the taxman has exulted over the sharp increase in the number of tax-filers, tax collections have slowed alarmingly.
Tax collections fell dramatically short of targets in FY19, and have continued to do badly in the first four months of FY20. In April-July, at `5.4 lakh crore, total gross tax collection grew only by 6.6% as compared to the FY20 Budget target growth of 18.3%. Direct tax collection came in at `2.2 lakh crore, up 5.8% from a year ago.
The budget estimate for direct tax mop-up growth is pegged at 17.4%. While corporate tax collections rose a mere 5.4%, personal income tax collections rose 6%. If GDP growth continues to remain sluggish—nominal GDP growth in Q1FY20 was at a 195-month low and real GDP growth at a 75-month low—this will hit tax growth even more.
Ironically, while a lot of attention is being paid to GST collections being poor, thanks to the budget moderating its expectations—collections are budgeted to rise just 3.6%—the government may even have a small surplus here since collections rose 6.4% in April-August, 2019.
Given tax-compliance is still very poor, the finance minister would do well to implement the recommendations of the Direct Taxes Code (DTC) on changes to direct income taxes. Apart from recommending a cutting of tax rates, the DTC report is also supposed to have rationalised tax rates; after a zero tax for those earning up to `5 lakh, for instance, the tax rate jumps to 20.8% for those in the `5-20 lakh income bracket; so, anyone whose income is even a few lakh over `5 lakh will find ways to try and lower their taxable income.
Also, while just 81,344 individuals reported earnings of more than `1 crore, the latest all-India income survey by Price, research agency, estimates the number of those earning over `1 crore at around 6.4 lakh in FY16; while Price estimates there are 11.6 lakh persons who earn `50-100 lakh a year, just 1.4 lakh persons declared this to be their income in FY16. If tax rates are more reasonable, the chances of higher tax collections are greater.