Reforming the Direct Tax Reforms in India
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On April 29, 2016, India’s income tax department released tax statistics after a gap of almost 16 years. Till 2000, the tax department used to publish All India Income Tax Statistics but the publication was discontinued for some unknown reasons. No explanations were given by the authorities for the discontinuation of this publication despite numerous demands made for its release by Indian economists and researchers.
According to media reports, the government released this data after French economist Thomas Piketty, author of bestseller Capital in the Twenty-First Century, highlighted the need for greater data transparency to carry out research on income inequalities in India. During his trip to India in January, Piketty also called upon wealthy Indians to pay more tax so as to reduce the levels of income inequality in the country.
The Data
The Central Board of Direct Taxes (CBDT) has uploaded a total of 84 page aggregate direct tax statistics on its official website. In its official release, the tax department said the key objective of publishing these statistics is to encourage “wider use and analysis of Income tax data by Departmental personnel as well as various stakeholders including economists, scholars, students, researchers and academicians for purposes of tax policy formulation and revenue forecasting.” There is no denying that reliable and timely tax statistics are necessary not only for academic research and public debate but can immensely help in formulating appropriate tax policies.
The time-series data for Financial Year 2000-01 to 2014-15 contains valuable information such as the total number of taxpayers (individual and corporate), the number of permanent account number (PAN), actual direct taxes collection, number of effective assesses and administrative costs. One hopes that the Indian tax authorities will now periodically put all direct and indirect tax statistics in the public domain. Since most tax returns are nowadays filed electronically, aggregate data could be made available to the public within weeks. In this regard, the Indian tax authorities can seek guidance from other G20 countries.
Direct and Indirect Taxes
For those who are not familiar with taxation system in India, let me explain. In India, taxes are broadly classified into two categories – direct and indirect. Direct taxes are applied directly on individuals and corporations and collected from them. Income tax, corporate tax and wealth tax are prime examples of direct taxes.
Direct taxes are considered to be progressive because they are based on the ability to pay besides they help in reducing income and wealth inequalities.
On the other hand, indirect taxes are collected by the government from an intermediary and are applied on the manufacture or sale of goods and services. Sales tax, value added tax, service tax, excise duty and custom duty are prime examples of indirect taxes.
By and large, direct taxes are considered to be progressive because they are based on the ability to pay besides they help in reducing income and wealth inequalities. While indirect taxes are considered to be regressive because every consumer (rich or poor) pay the same price for the purchase of a commodity. The indirect taxes hit the poor more than the rich because poor spend a large share of their income on consumption. Unlike direct taxes, indirect taxes are easier to collect with less administrative costs.
The Alarming Statistics
The facts revealed in income tax statistics are shocking, to say the least. Any observer of Indian economy would find it difficult to believe the extent of poor tax collection in India.
Below are some really shocking direct tax statistics:
- Only 1% of India’s population paid tax on their earnings in fiscal 2013. India has a total population of 1.2 billion but only 12.5 million paid tax in fiscal 2013.
Only 1% of India’s population paid tax on their earnings in fiscal 2013.
- In 2015-16, only 51 million (about 4%) filed income tax returns. It is important to note that the number of actual taxpayers is much lower because many have declared their earnings below the tax threshold. Over half of the tax returns have zero tax liability. For instance, 16.2 million paid zero tax in fiscal 2013 while 28.7 million filed tax returns.
- In fiscal 2013, there were only 18500 assesses (individual and corporate) which paid income tax in excess of Rs.10 million. Out of which, only 5430 individuals paid tax of Rs.10 million or more.
Only 3 Indians paid tax of Rs.1 billion or more in fiscal 2013.
- In 2009-10, the share of direct taxes was 60.78% of total taxes but it fell to 56.16% in 2014-15. It is projected to drop further to 51.05% in 2015-16. Whereas the share of indirect taxes is rapidly increasing since 2010.
- Only 3 Indians paid tax of Rs.1 billion or more in fiscal 2013. Only 8 individuals paid tax between Rs.500 million-1 billion during the same year.
- In terms of share of direct taxes in the Indian economy, the direct tax-GDP ratio was 6.3% in 2007-08 but is projected to fall to 5.47 percent in 2015-16, lowest in this decade. Overall, the growth rate in collection of direct taxes is lower than the growth rate in nominal GDP.
Just two Indian states, Maharashtra and Delhi, account for 53% of country’s total income tax.
- Just two Indian states, Maharashtra (39.9%) and Delhi (13.1%) account for 53% of India’s total income tax. The maximum growth in tax collection has been witnessed in smaller states (Sikkim, Mizoram, Nagaland and Kerala) between 2008-09 and 2014-15.
All the above statistics paint a not-so-rosy picture about the status of direct tax penetration and collection in India.
Several conclusions can be inferred from these statistics. First, the wealthy Indians and big corporations are not paying adequate direct taxes. And there is a complete mismatch between the growing number of dollar millionaires and billionaires in India and tax revenue receipts. Instead of relying on salaried class (who constitutes the biggest segment of taxpayers), the government should target super rich for better tax compliance and widening the tax base.
The domestic tax evasion is rampant but it has not received much attention from successive governments.
Second, our tax administration is still not free from corruption and abuse of power. Despite two decades of reforms in tax administration, there is a widespread public perception that tax bureaucracy is corrupt and inefficient. Third, domestic tax evasion is rampant but it has not received much attention from successive governments. The present government claims to be focused on bringing back dirty money stashed abroad but, at the same time, strict legal, administrative and political reforms should be undertaken to stop the tax evasion taking place within the country.
Need for Comprehensive Reforms
These statistics call for a fundamental rethink in India’s tax policy framework if the country wants to move away from a regressive to a progressive tax regime. Over the years, the successive governments have launched a number of direct tax reform measures.
There is no denying that some 8 million new taxpayers have been added in the last five years. Besides, numerous steps have been undertaken to make tax administration more transparent and efficient.
With such a low tax collection, India cannot achieve its growth potential, leave aside country becoming a superpower by 2020.
Nevertheless, these statistics underscore that the current tax reforms fall short of the avowed objective of raising substantial financial resources to meet the country’s social and developmental needs.
With such a low tax collection, India cannot achieve its growth potential, leave aside country becoming a superpower by 2020. India cannot build world-class public infrastructure and eradicate poverty from external financing (commercial or concessional) alone. The fulfilment of basic needs of the masses requires substantial financial resources. Domestic resource mobilization through progressive taxation should play the lead role in achieving these developmental goals.
India cannot build public infrastructure and eradicate poverty from external financing (commercial or concessional) alone. Domestic resource mobilization through progressive taxation should play the lead role in achieving these developmental goals.
In the post-liberalization period, policy discourse on reducing budget deficit has been predominantly centered on curtailing government spending rather than enhancing tax revenues and broadening tax base. These statistics call for a balanced approach.
While the proposed Goods and Services Tax (GST) is expected to broaden the base of indirect taxes, comprehensive administrative and legal reforms are required to curb massive evasion of direct taxes in India. Perhaps the time has come for reforming the direct tax reforms.
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