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Need to Widen the Tax Base

Amid rising wealth the tax base continues to be slim throughout the country unlike elsewhere

Sanjeev Sinha
Publish Date: May 27 2016 2:57PM | Updated Date: May 27 2016 2:58PM

Need to Widen the Tax Base

 Amid rising wealth the tax base continues to be slim throughout the country unlike elsewhere. Sanjeev Sinha looks into the reasons for this

Sample this: A wealth report published by Capgemini and Royal Bank of Canada (RBC) Wealth Management shows that India has the fastest-growing population and wealth of High Net-Worth Individuals (HNWIs) --- those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables and consumer durables -- in the world. According to the report, India was home to 1.98 lakh HNWIs as on December 2014 as against 1.56 lakh recorded in December 2013. In terms of HNWIs wealth, India had recorded a growth of 28 percent, i.e. from US$612 billion in 2013 to US$785 billion in 2014.
Similarly, a 2013 Kotak Wealth Management and CRISIL report estimated the number of Indian ultra-high net worth households — each with a minimum net worth of Rs 25 crore — at 81,000 in 2011-12, a growth of 30 percent over the previous year.
Now compare these figures with those released recently by the Indian Government, which reveal that there are just 18,359 (taxpaying) crorepatis in India. In fact, according to income tax data released recently by the Finance Ministry, just 18,359 individuals reported annual earnings of Rs 1 crore or more in 2011-12 and paid tax on it. This number seems a gross underestimation as it does not link well with other data such as the sales of luxury cars or luxury apartments.
For instance, just four luxury car makers – BMW, Audi, Mercedes-Benz and Jaguar-Land Rover -- reported sales of 25,645 units of cars in 2011-12, having an average price tag of Rs 40 lakh each. Thus, consumption and spending data for the year, especially of luxury goods, shows how deceptive these numbers may be and also blows holes in the Government’s official estimate of the number of taxpayers in the country.
Forget HNIs, tax evaders are found in each section of society. According to estimates, just 3 to 4 percent of India’s population pays income tax, compared to over 20 percent in China and 45 percent in the United States. The Income Tax Department’s recently-released Time Series Data for financial year 2000-01 to 2014-15 shows that there are just over 10 lakh income tax assesses in India declaring income in excess of Rs 10 lakh a year, while there were less than 20,000 assesses in 2012-13 declaring income in excess of Rs 1 crore a year. Of the 3.1 crore returns filed in the year, maximum 20 lakh were in the tax bracket of Rs 5.5 to Rs 9.5 lakh.
Even this year’s Economic Survey has found that India is far from being a full tax-paying democracy with about 5.5 percent of the people who earn paying tax and only 15.5 percent of the net national income being reported to the tax authorities. In fact, just 4 percent of India’s voters are taxpayers, though it should be closer to 23 percent, and surprisingly 85 percent of the net national income fall outside the tax net.
This is a gross underestimation in a country where about two million cars are sold every year, indicating thereby widespread under-reporting of income and tax evasion. Obviously, the income-tax base in the country continues to be too narrow and the problem of large-scale tax evasion or avoidance continues.
It is another thing that tax evasion, particularly by the rich and super rich, is a global problem. Even global private wealth that is hidden in tax havens is huge. For instance, a report published some time beck by James Henry, an expert on the subject of tax havens, estimated offshore wealth held in the form of financial instruments at $21 to $31 trillion, higher than the GDP of many countries put together. 
The report points out that about 100,000 people, representing 0.001% of the world population, control over 30 percent of the world’s financial wealth. The ‘source’ countries, from where private capital has been flowing out consistently over time, are typically the poor and developing nations, while the ‘destination’ countries are developed nations with strong markets, and powerful legal and institutional structures. The tax-evaded wealth held offshore is mostly unavailable to the source country, leaving them with severe capital shortages for development, and with crippling public debt that hurts the poor the most. The Panama Papers expose is a recent example of how wealthy individuals have hidden their incomes and evaded taxes in their home countries, while holding their wealth secretively abroad.
Although such things need to be tackled differently, there is definitely need to widen the tax base in India, apart from raising the direct tax to GDP ratio, which slid to 5.5 percent in 2014-15 from 5.9 percent in 2008-09. True, the issue of widening of tax base of the country has been a subject matter which has received considerable attention of the successive governments over the years. But, surprisingly, nothing concrete has been done so far.
In fact, instead of going after the big fish that dodge taxes, the income-tax department needlessly raises the compliance burden for the country’s salaried taxpayers, whose taxes are diligently deducted at source. For instance, the department has recently issued a new form that mandates salaried employees to furnish proof of leave travel expenditure and provide the lenders’ PAN to claim tax deduction on the interest on home loans. This means more paperwork for and hounding of salaried tax payers. The fact, however, is that tax evasion is rampant among the self-employed and employment is mostly in the unorganised sector, which is still outside the tax net.
There is also need to bring high agricultural income into the tax net as India’s policy of excluding agriculture does not distinguish between high and low incomes, but only on the basis of occupation. Further, there is an incentive to disguise non-agriculture income as agriculture income to avoid taxes. Therefore, a policy that provides safeguards to the poor by way of adequate exemption limits could be more equitable.
To widen the tax net and raise revenue for spending on India’s human capital development, this year’s Economic Survey also called for bringing rich farmers into the tax net, raising property tax rates and phasing out tax exemptions.
“There should be ‘reasonable’ taxation of the better-off, regardless of the source of their incomes, whether it is from industry, services, real estate, or agriculture,” Chief Economic Advisor Arvind Subramanian told reporters after the survey was tabled in Parliament.
According to Ficci, the Government can also consider bringing a presumptive profit estimation scheme by incorporating provisions in the income tax law to capture professionals who operate through transactions in cash and stay out of the tax net.
Similarly, it is recommended that the Government may provide some incentives so that dealers (particularly of high valued items like jewellery, FMCG etc.) are encouraged to accept payments through credit card / debit card and other banking instruments. These incentives could take the form of an additional deduction from income relatable to the transaction value for calculating the tax liability or a reduced Value Added Tax (VAT), suggests Ficci.
More importantly, a culture of tax compliance needs to develop. “When current and potential taxpayers hear that only some individuals declare incomes of over Rs 1 crore, it acts as a disincentive to pay taxes. The tax avoider needs to be seen as the exception rather than the rule,” says Tushar Poddar, chief India economist, Goldman Sachs.
According to Poddar, tax collection in India is also hampered by the long and multi-staged appeals process. For instance, an individual can appeal against an income-tax department enquiry over several stages. First, he can go to the commissioner of income tax to contest the claim. If he does not get a favourable outcome, he can then appeal to the income-tax tribunal. From there, he can take the income-tax authority to the High Court, and then finally to the Supreme Court. This means multiple stages to contest taxes in India, while most other countries tend to have only one or two stages. “This reduces the efficiency of tax collection,” he says.
Clearly, the income-tax base in India continues to be too narrow and there are several things which can be done to widen the tax base. As the problem of large-scale tax evasion or avoidance continues, the focus has to remain on widening the income-tax base, and recent efforts to phase out exemptions must also be speeded up.