New data show tax reform, better tracking needed
After a 15-year hiatus, the Central Board of Direct Taxes has finally released data on Indian income-tax payers - how many there are, and what they pay.
Some aggregate numbers are provided only as a time series between 2000-01 and 2014-15, but a snapshot of the breakdown of tax payers has also been provided - for the single assessment year of 2012-13, or in other words for income earned during 2011-12.
The government had been pressured to release this data by a number of academics and researchers, including the French economist Thomas Piketty, who wrote the best-selling Capital in the Twenty-first Century in 2013.
The government deserves to be complimented for living swiftly up to its promise to eventually release the data - it should complete its promise by providing the statistical break-up of taxpayers for the other years, too, so as to further aid research, and, hopefully, formulation of better tax policy.
Some preliminary facts about what the data would reveal had already been known. Inequality is usually studied through tax data, as by Mr Piketty, and the Economic Survey 2015-16 had done some work and established that inequality in India had grown quickly through the 2000s - in the words of the Survey, in approximately similar ways to how it has grown in the United States.
But other disquieting facts have also been revealed. Perhaps most disturbing is the fact that only 18,358 individual tax payers declared incomes of over Rs 1 crore for 2011-12.
This is a gross underestimation. Consider the fact that in 2013, just luxury car sales – of top-of the-line Jaguar, Mercedes. BMW and Rolls-Royce models – were over 33,000. Nor do data from the top end of the real estate market really support this number.
In general, so few high-end incomes in a country where, as Credit Suisse has argued, the top one per cent of the population owns 16 per cent of assets, is unlikely. Even more worrying is the revelation that almost 55 per cent of the 31 million individuals filing income-tax returns reported no income at all and only about two million of them showed annual income of between Rs 550,000 and Rs 950,000.
This again 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.
Clearly, the income-tax base in India continues to be too narrow. The problem of large-scale evasion or avoidance continues. The focus has to remain on widening the income-tax base, and recent efforts to phase out exemptions must be speeded up.
Meanwhile, the narrowness of the tax base should lead to some introspection on the part of the tax authorities. Clearly there is a lack of both push and pull factors for potential taxpayers.
In terms of push factors, the tax department has to work out more up-to-date methods of identifying potential taxpayers. The streamlining of various data sources already accessible to the government must be carried out through cross-checking of information from various sources. Using “big data” techniques, multiple streams of data can be mined for individuals who have consistent spending patterns in excess of their declared income. This will allow for more focused audits.
But pull factors are as important. The simplest I-T form for those with several sources of income is now seven pages long. It must be two or at most three pages. In fact, online and paperless filing of returns and payment of tax should be made possible. Finally, the government’s approach to tax amnesty must be re-examined in light of this data. Does it indeed encourage evaders to enter the tax system? Does it reward bad behaviour, and create incentives for future evaders to stay out of the system in anticipation of a future amnesty? The answers to these questions have taken on considerable urgency.
Illustration: Uttam Ghosh/Reuters