India’s income tax department recently released time series data for the period 2000-01 to 2014-15. This was an attempt to enhance transparency and encourage analysis which could provide insights for policymakers. This is also being seen as an attempt by the government to sensitize many on the need for the affluent to contribute more at a time of growing disparities.
Worrying trends shown in the data:
- There are just 18,359 individuals who have reported earnings in excess of Rs 1 crore in 2011-12 and paid tax on it.
- Just 1% of individuals, who declared their income in assessment year 2012-13, accounted for almost 20% of the taxable income.
- Among corporates, a little more than 5% of the companies accounted for a whopping 94% of the taxable income.
- Direct tax collections have fallen drastically in the last five years, growing at an average annual rate of 8.5% between assessment years 2011-12 and 2015-16, compared to the 14.1% over the previous five years.
- The drop in the growth rate of direct tax collections was accompanied by an equally dire slowdown in the growth of corporate tax. Corporate tax grew at an average annual rate of 7.1% between assessment years 2011-12 and 2015-16, down from the heady 15.6% seen in the previous five years.
Hence, it can be concluded that Indian income-tax base is very narrow. The problem of large-scale evasion or avoidance continues.
Limitations of Indian tax structure which result in tax evasion:
- High rate of taxation.
- Failure to curb bribery.
- Lack of simplified procedures.
- Existence of large number of taxes.
- Complex tax laws and loopholes in the existing taxation policy.
- Lack of unorganized and systematic administrative structure.
- Deficiencies in implementing penalty provisions.
What can be done to improve the tax base?
- The focus has to remain on widening the income-tax base, and recent efforts to phase out exemptions must be speeded up. Meanwhile, the narrowness of the tax base should lead to some introspection on the part of the tax authorities.
- The tax department has to work out more up-to-date methods of identifying potential taxpayers.
- The streamlining of various data sources already accessible to the government must be carried out through cross-checking of information from various sources.
- Using big data techniques, multiple streams of data can be mined for individuals who have consistent spending patterns in excess of their declared income. This will allow for more focused audits.
- I-T form for those with several sources of income should be made even simpler. Online and paperless filing of returns and payment of tax should be made possible.
- The government’s approach to tax amnesty must be re-examined in light of this data. The government needs to push through meaningful reform like taxing large farm incomes and rationalising bounties enjoyed by the well-off, to widen the base.
For a country like India, which needs to spend on health, education and social security and also build social and physical infrastructure, it is critical to address the challenges on the tax policy front swiftly. These include both the widening and deepening of the tax base, whittling down of exemptions and improving compliance, especially by leveraging technology. The release of data offers an opportunity to policymakers to engage in a wider public debate on the current tax policy, including on the capital gains tax — on which the government has kicked off a corrective step in this year’s budget.