Easy wins

A narrow direct tax base has always been the bane of the Indian economy, forcing governments to rely on regressive indirect taxes to make their fiscal ends meet. That’s why the latest statistics released by the Income Tax department showing a significant improvement in direct tax compliance and collections represent good news for not just the fisc, but also the taxpayer. With the number of income-tax returns filed witnessing an 80 per cent jump between FY14 and FY18, growth in India’s tax base has briskly outpaced population growth, indicating a quantum improvement compliance. Direct tax collections, after leapfrogging by 56 per cent to over ₹10 lakh crore, now chip in with 53 per cent of the tax kitty. This is welcome, given that income tax is a progressive tax where the affluent sections of the population pay higher rates.

The Centre may like to attribute this marked improvement in compliance culture to its lightning strike on high-value notes in 2016. But in truth, it is difficult to say if it was also triggered by the aggressive follow-up actions by the taxman, who has peppered non-filers with notices, taken up more scrutiny assessments and unleashed countrywide raids in the last couple of years. Whatever the reasons, the tax department cannot afford to rest on its laurels. For much of the improvement in direct tax compliance in the last four years has come from plucking low-hanging fruit — cracking down on cases of individual evasion, while the compliance culture remains poor among businesses. A deep dive into the CBDT data reveals that while the number of individuals filing returns has vaulted by 84 per cent in the last four years, the number of companies and firms filing their returns has expanded by 31 and 45 per cent, respectively. What’s worse, nearly two-thirds of the taxable income declared in 2017-18 came from individuals. It also hard to fathom how the number of individual crorepatis in India (81,344) based on annual income, can vastly outnumber firms and companies earning ₹1 crore (12,990 firms and 39,753 companies respectively).

The above statistics indicate either that a vast majority of Indian businesses are operating at an abysmally poor scale, or that tax evasion is quite pervasive. Both require policy fixes. There is little sign yet that the tax department is tapping into the potent anti-evasion tools offered by the GST network, to cross-verify firms’ GST returns with their corporate tax filings, to pinpoint blatant under-declaration of income. Identifying cases of corporate tax evasion will obviously entail far higher analytical skills and data-gathering capabilities than pinning down individual evaders. This calls for the tax department to augment its capacities by recruiting specialists and breaking down silos between its direct and indirect tax departments for seamless information sharing. The Centre too must make a concerted push for formalisation, if this anti-evasion drive is to net the really big fish.

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