Gaping holes in the tax map

The popular perception is that a majority of individual tax payers are the salaried lot.

But, in fact, according to tax data made public recently, sole-proprietors running small-to-medium-sized businesses, professionals such as chartered accountants, lawyers and doctors and other consultants together outnumber salaried assessees.

These sections of assesses can legitimately claim deductions on various expenses incurred in running their businesses or in providing services, which lowers their taxable income.

That may account for why the super-rich individuals are under-represented in the tax data and also why individuals, who together account for 92.4 per cent of all tax assesses, contributed just about 30 per cent of all direct taxes collected by the government for the financial year 2011-12.

The Income Tax Return Statistics Assessment Year 2012-13, released by the Income Tax department last week, showed that 2.87 crore people filed their returns as individuals. Of these, only about 1.17 crore (or 41 per cent) reported salary income. In comparison, 1.51 crore (or 52.4 per cent) reported income from business or profession.

The data also reveal that most of these assesses do not have income from house property or from capital gains, and very few admitted to earning interest income. However, some 48 per cent of the individual assessees declared they had income from other sources such as dividend and interest on securities. And less than 20 per cent declared income from interest on bank deposits.

In all, 9 per cent of the individuals who filed returns declared they earned income from house property: that’s about 26 lakh individuals. Just about 1 per cent of all individuals (2.8 lakh) declared income from long-term capital gains and about 2 per cent (5.9 lakh) said they had income from short-term capital gains.

Essentially, this is a reflection of the poor penetration of the equity culture. It is also likely that the value of transactions in various capital assets, real estate and housing is under-reported.

Short-term capital gains tax is applied on sale of capital assets and property that are held for less than 36 months from the date of acquisition; long-term capital gains tax is applicable on transactions in assets that are held for longer than 36 months. In the case of equities, equity-oriented mutual funds and other listed securities, short-term capital gains apply to any sale that occurs within 12 months of acquisition.

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