Why the fall in taxpayers to 1.5 crore isn’t worrisome

Lokeshwarri S K | Updated on August 26, 2020

Creamy layer The 1.5 crore Indians who pay taxes account for a mere 1.1 per cent of the total population   -  SB Stock

The drop is due to leeway given to low-income earners and the demographic profile. Focus must be on high-income earners

On August 13, two noteworthy events took place. While unveiling the taxpayer’s charter and the platform for faceless assessment and appeal for tax, the Prime Minister pointed out that the number of taxpayers in the country at 1.5 crore, is extremely low.

That evening, the government platform, MyGovIndia tweeted a slide listing 11 specified financial transactions that have to be reported by the supplier of goods or services to the Income Tax Department. The tweet was, however, removed soon after and tax officials maintained a mysterious silence regarding the deleted tweet.

The two events are entwined, though. The tax department, constantly under pressure to improve collections, has to now live with a very small number of citizens paying tax, compared with 5.95 crore last year. In a bid to improve collections, despite fewer taxpayers, the IT Department has been on a data-collection spree. The deleted tweet is one such effort.

How did the number fall?

But the reduction in the taxpayer number is largely due to the recent leeway given to low-income earners. The demographic profile of the country also results in reducing the tax base significantly.

Instead of worrying about the tax base, it may be better if the department targets the creamy layer where more revenue can be generated with less effort.

Around 5.95 crore returns were filed by individual taxpayers in 2018-19. Assuming a 5 per cent growth, 6.24 crore returns would have been filed in FY20.

Then, why is the Prime Minister citing the number of taxpayers as 1.5 crore? This is due to the fact that 75 per cent of the taxpayers have taxable income below ₹5 lakh. The Budget of 2019-20 had given 100 per cent tax rebate to individuals having taxable income up to ₹5 lakh. So, 75 per cent of return filers pay no tax now. If only 25 per cent of the 6.24 crore returns result in tax receipt for the government, then the people paying tax reduces to 1.5 crore.

The 1.5 crore Indians who pay taxes account for a mere 1.1 per cent of the total population. If we see the taxpayer number as a proportion of voting age population (which is roughly 55 per cent of the population), it improves only slightly, to 2 per cent. This compares quite poorly with countries such as Norway, Sweden and Canada, where over 80 per cent of voters pay tax, or other developed nations, where at least 40 per cent of the voting population pays tax.

But India has some peculiarities that need to be taken in to account before getting too worried about fewer numbers paying tax.

The age-profile of the country is quite young, with 62 per cent in the working-age group, between 15 and 59. That reduces the number of people liable to tax to roughly 81 crore.

Of this, around 55 per cent are employed in agriculture and allied activities and thus may be paying no taxes. The tax base thus reduces further to 37 crore.

If we remove the proportion of people in the unorganised sector and having income below ₹5 lakh (conservative estimate of 40 per cent), then the tax base shrinks further to 22 crore. Of this base, 6.2 crore are filing returns, which is a decent 28 per cent. But if we consider the total direct taxpayers, including those who are subject to tax deduction at source, of nine crore, then the proportion of taxpayers is a more decent 41 per cent. Let’s not forget that none of us are exempt from indirect taxes — excise duty, GST etc.

Go after the top 1 per cent

That said, the government does have a major problem in making people pay taxes with evasion being rampant. While evasion takes place at every strata, it may be operationally easier for the IT Department to go after the big fish, the creamy layer of the society.

According to numbers put out by the Finance Ministry this month, 92 per cent of those who file returns have income under ₹10 lakh. While those with income of ₹10-50 lakh account for 7 per cent, just 1 per cent of taxpayers have income over ₹50 lakh.

An Oxfam report showed that 73 per cent of the wealth generated in 2017 went to the richest 1 per cent. The report also states that between 2018 and 2022, India is estimated to produce 70 new millionaires every day.

It is, therefore, the creamy layer that has the most wealth. This segment files around six lakh returns (1 per cent of 6.24 crore returns).

Intense scrutiny and tax demands can be limited to this section of taxpayers, reducing the workload of the Revenue considerably.

Reliance on data

But there are also high income earners outside the tax-net altogether. Tracking them through high-value transactions involving gold jewellery, real estate, automobiles, etc., is a good idea.

Investment vehicles where black money may be parked, including banks, mutual funds, insurance and so on, are also coming under closer scrutiny with the IT Department collecting information directly from the receivers.

This is a good strategy but the revenue department needs to process the information in an effective way such that it avoids unnecessary tax demands and harassment of honest tax payers.

The IT Department can skip scrutiny on two types of tax returns. One, the salaried where tax has already been deducted and deposited by the employer and returns where the earning is under ₹10 lakh per annum. Since these returns account for 92 per cent of the returns, it will not only save time and effort, the manpower can be used to go after the larger tax evaders.

A part of the deleted tweet, where it was proposed that three financial transactions should involve compulsory filing of returns — bank transactions above ₹30 lakh, all professionals, businesses with turnover above ₹50 lakh and rental income over ₹40,000 per month — is also a good idea. If people have money for such deals, it will be good to know their source of income.

Finally, it is up to each of us to pay the taxes due. If getting revenue through income tax become more and more difficult, then the government may have no recourse but to look seriously at, perhaps, a novel form of consumption tax to make good the shortfall.

Published on August 26, 2020

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