In the budget for 2013-14, P Chidambaram then finance minister [FM] under UPA dispensation had introduced surcharge @ 10% on individuals earning more than Rs 1 crore per annum [or the so called super-rich]. This was imposed on the firms as well. Arun Jaitely, FM under Modi – government increased this to 12% in 2015-16 and further to 15% in the budget for 2016-17.
Both Chidambaram and Jaitely were convinced was that the super-rich who are enjoying the fruits of development much more than those in the lower income strata must also contribute a higher share of their income to the national exchequer. So, they took the ‘progressivity’ inherent in taxing personal income to the next higher level.
However, income-tax data released by ministry of finance [MoF] may not be so pleasing to Jaitely. Out of a total of 28.7 million individual assesses in 2012-13, only 18,358 [a trifle 0.06%] earned Rs 1 crore a year. Including corporate assesses, the number earning more than a crore was 21,819 or 0.07% of total I-T returns filed. Today, the scenario may not be very different even as current data is yet to come.
This is amusing [to say the least] considering the gargantuan size of Indian economy at US$ 2 trillion [Rs 130 lakh crores] and abundance of wealthy persons [this can be easily gauged from living styles and spending extravaganza visible in every major city and even in satellite towns]. Clearly, I-T department has not captured most of them. Until that happens, the levy of surcharge will be of little value from the view point of garnering resources.
During 2012-13, out of a total of 28.7 million individual assesses who filed I-T returns, 16.2 million did not pay any tax. And, the number of those who paid tax was only 12.5 million. This was a mere 1% of India’s size population of around 1230 million in that year. Even when taken as a proportion of the middle class [around 250 million], those paying tax are embarrassingly low of 5%. A predominating share of individual assesses are from the salaried class where the employer is mandatorily required to deduct tax at source [TDS]. But for this, the percentage share of persons paying tax in total population/middle class would have been even lower than 1%/5%.
I-T data shows that corporate tax collections increased from Rs 35,696 crores in 2000-01 to about Rs 454,419 crores during 2015-16, a 12 fold jump. The personal income tax increased from Rs 31,764 crores in 2000-01 to Rs 286,801 crores in 2015-16, a 9 fold jump. Including other taxes, total direct tax collections went up from Rs 68,305 crores in 2000-01 to Rs 742,295 crore during 2015-16. The nearly 11 fold increase in collection of direct taxes is no consolation at all as it is on a very low base. When taken as a proportion of GDP, this was mere 6.3% even at its peak reached in 2007-08 but has since declined to 5.47% during 2015-16. Together with indirect taxes 4.5%, the overall tax to GDP ratio is around 10%.
Plus state taxes [value added tax and other local levies such as purchase tax, turnover tax, entry tax etc] it is 15-16%. This is 5-6% lower than tax to GDP ratio in emerging market economy countries and nearly half of ratio in OECD [Organization for Economic Cooperation and Development] countries – a rich members club – at 34%.
If, our tax collections have been languishing at low level, a paramount reason for the same is an endemic culture transcending all strata of income earners to keep themselves away from the tax radar completely or take recourse to all sorts of techniques [even disingenuous in many cases] to keep their tax liability to bare minimum. This culture had its seeds sown when the tax rates were pushed to astronomical level [in the 60s, the maximum marginal tax rate was 90%] but was not given up even when successive governments had lowered them. A plethora of exemptions and deductions – given in the name of promoting backward area development, R&D or exports etc – only aggravated such practices.
A potent factor has been phenomenal growth of services sector since early 90s. At present, it accounts for about 60% of GDP. Yet, its contribution to government’s general revenue is only 5%. True, ever since the introduction of service tax, the number of services brought under its ambit has increased. Yet, the share remains low because a huge volume of transactions go un-recorded.
A large proportion of economic activity [over 80%] is generated by small and medium enterprises (SMEs) or so called informal sector. Although, these enterprises enjoy strong profitability growth, the government has not captured their earnings in tax revenues due to a variety of exemptions and compliance issues. The overriding role of corrupt officials who often look the other way [albeit for a price] cannot be ruled out either.
Under our laws, agriculture income is exempt from income tax. This is a legacy from the past when the policy makers believed that farmers toiled hard not just for earning their livelihood but also fed the whole country. And, even if some surplus is left after meeting crop related expenses, it was felt the same should be left with them for making investment in improving soils health and raising yield.
Today, even as majority of the farmers are still living in misery [courtesy, low crop yield and realization from sale of their produce], there is significant section in particular, persons with large holding size and those in to cash crops and plantations or those dealing in seeds who generate substantial income. Yet, they remain out of the tax net to agriculture per se getting an exempt status. In this backdrop, if tax to GDP ratio fails to get required buoyancy, to an extent, blanket exemption given to agricultural income also has its share.
Modi – government has taken a number of initiatives to get more persons in to the tax net and ensure that they pay tax commensurate with their income. These include collecting information from important sources such as banks, credit card companies etc to identify potential assesses; making it mandatory for persons to show their PAN [permanent account number] card for purchases above a certain threshold; promoting use of credit/debit cards and other electronic/cashless mode for transactions; introduction of ‘presumptive’ tax for professionals having income below a threshold and an ever alert but non-invasive team of tax officials for achieving better coverage.
For the corporate sector also, it has announced several measures such as gradual phase-out of exemptions and concomitant reduction in tax rate; lower tax rates for new projects and start-ups; scheme for settlement for payment of tax [sans interest and penalty] where assessments are pending; one time dispute resolution in cases where demands are pending under 2012 retrospective amendment enacted by then UPA – dispensation; setting up of dedicated commercial courts for fast tracking of cases under dispute/arbitration etc.
No doubt, these steps across a wide spectrum hold enormous potential but implementation is the key. The government can make real impact only by changing the mindset of people at large and inculcating in them a sense that Indian economy will emerge stronger if they pay taxes honestly.