The Indian middle class, which is one of the key contributors to the income tax collection kitty, may see things with a different perspective as the Narendra Modi-led government aspires to have a third term.

While the government has taken measures to ease the direct tax collections system it has left the middle class disappointed as far as lowering of the rates and adjustments of the tax slabs are concerned.

Measures, both big and small, have helped boost collections especially on the personal tax front, as well as bring more assessees under the returns filing net. The introduction of the simplified New Tax Regime and harnessing the use of technology — be it for capturing possible tax leaks or facing officers without fear of being harassed — saw noteworthy progress too.

Personal tax

On the face of it, the 10-year growth (CAGR) in total direct tax collections for the present government stands at 12.1 per cent vis-à-vis the 19.1 per cent achieved by the UPA in 2004-2014. However, this number must be seen in light of the Covid impact as well as the rationalisation in corporate tax rates around the same time. Corporate taxes were cut to 22 per cent (sans incentives) in 2019 and a 15 per cent tax rate for new manufacturing companies was announced.

Corporate tax collections dropped by 16/17 per cent each year in fiscal 2020/2021 while personal tax collections too saw only a tepid growth/mild fall in these years. In contrast, collections did see an uptick even in the global financial crisis years of the UPA.

Personal tax collections have done the heavy lifting for the NDA, with its share steadily increasing from 38 per cent ten years ago to 52 per cent now. Personal tax collections grew at a 16.1 per cent CAGR in the last decade, surpassing the growth rate in overall collections.

Stand-out features

Four notable features define the measures of the NDA on the direct taxes front. One, the efforts to improve collections by plugging loopholes and increasing tax incidence on higher income cohort. Over the last 10 years, even as basic exemption limits were raised, the tax rate for the lowest slab was cut, rebates given, standard deduction from salary was reinstated, Sec 80C deduction limit was enhanced to ₹1.5 lakh and an additional deduction of ₹50,000 for the NPS given, the government made sure it played Robin Hood.

Tax incidence on the high-income group was increased from just a 10 per cent surcharge and a single slab of ₹1 crore and above to surcharge on multiple slabs beginning ₹50 lakh and at different rates up to 37 per cent. Tax-fee maturity proceeds on ULIPs with premiums of over ₹2.5 lakh were stopped. Similarly, EPF interest on contributions above a certain threshold was brought under the tax net. Employer contribution to PF, super annuation and NPS was capped at ₹7.5 lakh beyond which it became taxable as perquisite in the hands of the employee. LTCG tax on equities and equity mutual funds was introduced. Set off of a loss on let-out properties (arising due to interest on loan) was capped at ₹2 lakh.

Secondly, technology was harnessed for better compliance. Pre-filling of returns, which began with just a few heads such as personal information, salary and TDS, expanded to include capital gains from listed securities, dividends and interest income, among other things. A more comprehensive AIS replaced the Form 26 AS, with data on mutual fund investments to foreign remittances enabling better matching with data provided in the returns. More and more transactions were brought under TDS and TCS provisions to ensure a trail for plugging leaks.

Three, efforts were made to widen the tax base. In the NDA regime, among other measures to improve compliance, return filing was made mandatory for deposits of more than ₹1 crore in a current account, spending more than ₹2 lakh on foreign travel or payment of ₹1 lakh or more towards electricity bills. The widening coverage of TDS and TCS provisions too ensured a bigger catchment pool for the department, wherein returns have to be filed to claim refunds. Fourth, ease of doing business moves — whether it is the introduction of the new simplified tax regime, faceless assessments and appeals which are now redefining interactions with the department for the better, the concessions accorded for senior citizens over the years or the faster processing of returns and refunds — are worth noting too.

More Scope

What remains work-in-progress are the steps taken towards the simplification and transparency of the regime, according to experts we spoke to. Measures to widen the tax base are another area. Data from the tax department shows that while the number of return filers has grown at a 10-year CAGR of 9.33 per cent from FY14, the number of taxpayers for the relevant assessment years has grown at a lower 6.6 per cent. While getting assessees to file the returns is the first step, ensuring they pay the exchequer its dues is the next.

More importantly, corporate tax has not been pulling its weight. At 8.8 per cent CAGR, corporate tax collections have grown at only half the rate of personal taxes in the last 10 years. As the new tax regime becomes the default, the extent of adoption and impact on collections also needs to a watched. There needs to be a careful balance between giving extra concessions to sweeten the regime (as has been done in recent Budgets) and retaining the basic structure of a simplified regime with minimal revenue impact for the government.

Overall, reasonable tax rates on a wider base with better compliance are the holy trinity for any government to strive for.