Busting the myths on tax evasion


I. Busting the myths on tax evasion - (source: The Hindu)

More tax returns filed, among other statistics, show that we are not a country of evaders

The Income Tax department has just released new data on its direct tax mopups for assessment year 2015-16. Every time new data becomes available on the subject, it is used to reinforce the impression that Indians love to skip their taxes. But an objective analysis suggests that the despondency is overdone.

If filing an income tax return is a sign of voluntary compliance with the country’s tax laws, then India has been registering very material improvement in this metric in recent years. The tax administration has recently begun sharing data on ‘Income Tax Return Statistics’ for each assessment year. The series flagged off in financial year FY12 (equating to assessment year 2012-13) and is updated until FY15 (assessment year 2015-16).

Rising numbers

It shows that the number of valid income tax returns filed rose by a good 40% from 3.11 crore to 4.36 crore between FY12 and FY15. Those return filers comprise individuals as well as other taxable entities such as Hindu Undivided Families, firms, companies and nonprofitorganisations. The number of individuals filing a tax return showed equally impressive growth from 2.87 crore to 4.07 crore.

In effect, the number of IT return filers in this period grew far faster (12% a year) than India’s population (estimated at 1.2%). This could partly reflect the demographic shift which is underway, where the working age population is expanding faster than other demographic segments. But it also reflects a culture of improving tax compliance.

Talking of compliance, there is brisk growth in the income that assesses are declaring to the taxman too. The total income reported in these returns (Returned Income) vaulted from 15.6 lakh crore in FY12 to 29.5 lakh crore in FY15, an 89% jump. Has demonetisation improved these metrics? Difficult to say. While many piecemeal data points on tax filings have been bandied about by the government this past year, official CBDT data that is comparable is not available beyond FY15.

Low income, not evasion

Sceptics point out that while the number of tax returns filed may be growing, a good number of those return filers do not cough up any tax. True, of the 4.36 crore return filers for FY15, as many as 1 crore declared income below the taxable threshold of 2.5 lakh. But this does not necessarily prove deliberate evasion.

It may only go to show that a majority of Indian workers do not yet earn an income reasonable enough to fall into the tax net.

The Economic Survey 2015-16 made the point that India’s tax slabs are set rather high because individuals earning 2 lakh plus make up the top 5.8% sliver of the population. A recent Credit Suisse Global Wealth Report calculated that the median wealth of Indians stood at just 84,175 ($1,295) in 2017. Given that an individual’s wealth is expected to be many times his annual income, this data supports the view that a majority of Indians do not pay income tax simply because they do not earn enough to do so. As India’s economic prospects improve and lift aggregate income levels, a larger slice of the population may graduate to paying income tax. In fact, this trend is already underway. Between FY12 and FY15, the number of returns with income below 2.5 lakh shrank from 1.55 crore to 1 crore and those in the 2.5 to 10 lakh bracket jumped from 2.08 crore to 3.02 crore.

Not so narrow tax base

Commentators complain that India’s direct tax base is woefully narrow, with just 2-3% of the population filing returns. But to correctly assess India’s direct tax base, the ‘number of effective assessees’ is a better measure than IT filings data.

What is the difference? Well, in India, a large number of citizens contribute to the tax kitty by way of Tax Deducted at Source (TDS), but skip filing their IT returns. This could be because TDS is compulsorily deducted without an actual tax liability.

Or, it could be that people find the paperwork too cumbersome. Including the TDS and other direct tax payers, the ‘number of effective assessees’ has jumped from 4.72 crore in FY12 to 6.26 crore in FY16, CBDT data shows. So, if you consider anybody who forks out a direct tax as a part of the tax base, it would stand at 6.26 crore. That is not a bad number.

In India, a straight forward comparison of the number of taxpayers with the total population count is a flawed measure of tax compliance, because only workers who earn income from taxable economic activities, are legally liable for income tax.

Census 2011 data tells us that only about 40% of the Indian population was employed for whole or part of the year. It is estimated that agriculture, income from which is tax exempt, accounts for nearly half of the workforce. Therefore, if one attempts a ballpark calculation and excludes agriculturists and the unemployed from the total population count (estimated 132 crores for 2016), there would be roughly 26 crore taxable incomeearners in the economy.

Of these, 6.26 crore pay direct taxes in one form or another. The number could still do with improvement. But it is certainly not cause to brand India as a nation of tax evaders!

II. Union Budget 2018 wish list by experts:

  1. Reduce GST on insurance products from 18% to 5%.

  2. Reduce long term capital gains holding period for Real Estate Investment Trust.

  3. Make home insurance mandatory and offer tax deductions on premia.

  4. Include low risk hybrid funds under section 80C.

  5. Hike tax free limit for medical allowance.

  6. Abolish dividend distribution tax.

  7. Facilitate donation and gifting of investments.

  8. Retain long term capital gain tax benefit on equities.

  9. Increase duration for education loan deduction.

  10. Bring back standard deduction for salaried class.

  11. Reduce holding period for long term capital gains tax.

  12. Tax developers for unsold inventory to bring down Real Estate prices.

  13. Reduce import duty on gold to align with GST.

  14. Change tax rules for vesting date of stock options.

  15. Make pension plans tax friendly.

  16. Offer tax reliefs to senior citizens

  17. Cut GST rate for property from 12% to 5 %

  18. Let NRI’s claim deductions for treatment of relatives.

  19. NPS - upto 60% of corpus to be made tax free.

  20. Raise limit for tax deductions for NPS contribution by self employed.

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