Its return filing time. With demonetization last year, this year's returns are crucial for the government in its quest to widen the tax base, increase the tax revenue, and generally drive people to be more honest with the government than they have been in the recent past. How will they do it? Brian Fernandes examines
There's a poem doing the round on whats App. Its attributed to various people, but it does seem like a directive from anon to the government. On the one hand it represents the sum of all fears of the middle classes in India and by extension it is also the taxman's dilemma. It goes like this
Tax his land, tax his wage,
Tax his bed in which he lays.
Tax his tractor, tax his mule,
Teach him taxes is the rule.
Tax his cow, tax his goat,
Tax his pants, tax his coat.
Tax his ties, tax his shirts,
Tax his work, tax his dirt.
Tax his chew, tax his smoke,
Teach him taxes are no joke.
Tax his car, tax his *ss
Tax the roads he must pass.
Tax his tobacco, tax his drink,
Tax him if he tries to think.
Tax his booze, tax his beers,
If he cries, tax his tears.
Tax his bills, tax his gas,
Tax his notes, tax his cash.
Put these words upon his tomb,
"Taxes drove me to my doom!"
And when he's gone, don’t relax,
Get after his legacy with an inheritance TAX!
The value proposition
Only 1.5% (1.9 Crore Individuals) of the Indian Population of 125 Crore pay income tax. Top 0.1% (23932) individuals account for 26% of the tax revenue. The 0.1% declare an income of over Rs: 1 Crore a year, 6.6% declare an income of Rs: 10 Lakhs to 1 Crore and 93.3% declare an income of Rs: 0 to Rs: 10 Lakhs a year. Statistics show that Tax revenue has increased but the number of Tax payers has fallen. 93% of India is not liable for income tax - they are either BPL or Farmers, or those earning less than Rs: 2.5 Lakhs a year and exempt from income tax by law. Also, professionals often declare less than they actually earn, paying a lower rate of income tax.
These statistics indicate 93 percent of the Tax payers are middle class. A middle class family in India in the Metros and tier II cities of India does need in excess of Rs: 50000.00 a month net of taxes to live fairly and put some away for a rainy day, which most families do. Saving for a rainy day is ingrained in them unlike in the west, where living is more day to day. That would boil down to a gross income of a little over 10 lakhs a year which would result in an income tax payout of around 25% overall, given the slabs in place.
The tragedy is that from the net income generated after income tax, families have to pay indirect taxes on almost all goods and services they buy or use (now GST) in the average range of 20 Percent -from soap to Life insurance premiums, from hospital bills to telephone bills and everything in between.
Thus the total incidence of tax on a middle class family in the range of 50 to 55% of his income.Incidentally even as the Central Government is promoting a cashless transaction culture post demonetization, sadly it has taxed those cashless transactions too.
There is no cap on GST in the legislation on the subject, and successive governments or the same government in successive years will only increase the tax rates as the pressures mount for welfare sops for votes, salaries and perks to government servants and public representatives and a bigger war chest to meet security challenges now on three fronts - Western, eastern and internal. Lost in transit will be the middle class family, who is compelled to pay, but receives very little in return for what he pays unlike in western countries, where too the tax incidence is high, but the return on investment is perhaps more proportionate. Perhaps here lies the reluctance to comply.
Good Cop, Bad Cop
Expect neither sympathy nor empathy on the part of the Government in this regard. The Government has set an ambitious target of Rs 9.8 lakh crore for financial year 2017-18 and they are determined to meet it using "all measures" even as they have assured citizens via ads in major newspapers that if they are honest they have nothing to fear.
However it would appear that they are indeed missing the wood for the trees. Tax Payers are by and large honest. It is those that do not pay taxes that must be scrutinised. So is this the good cop, bad cop strategy in play?
Southern daily, Deccan Herald on the 15th of June, carried a report that indicates that the Central Board of Direct Taxes (CBDT) has asked income tax officials to pull their socks up to shore up revenue collection, noting that it is at present “not satisfactory”. The CBDT, in a statement on Thursday, noted that the net direct tax collection (Rs 1.42 lakh crore) represented 14.5% of the total budget estimates of direct taxes of Rs 9.8 lakh crore for financial year 2017-18.
The CBDT is the policy-making body of the I-T Department, which is entrusted with the task of collecting direct taxes under various heads. Consequently, the Central Board of Direct Taxes (CBDT) chairman Sushil Chandra has issued a directive to all his regional chiefs on Thursday, asking them to take “all measures to increase revenue collection so that the position at the end of September quarter comes in line with the desired growth rate”.
The directive followed a review of direct tax collections till June which showed that the growth in revenue collection, on several parameters, was “not satisfactory”. “The gross collections have increased by only 8.4% and it is only due to lower refunds that the net collections are showing a growth rate of about 15%,” Chandra added in the directive and indicated that "sustained efforts throughout the year” were required to achieve the target.
Chandra said and cautioned that once more refunds were issued, the overall growth rate might again register a dip. Chandra said the growth rate of collection under heads such as advance tax, tax deducted at source (TDS) and others was “significantly lower” than that last year.
He said the review conducted by the board found that most I-T regions in the country were “showing very low growth either in terms of gross collections or net collections or both”. The chairman also directed the department heads to tap various sources to improve the collection and look at “alternative sources” to make up for the deficit. There is no clarity on what these "alternative sources" and "all measures" would mean for individuals within tax brackets.
Would it mean more scrutiny? More harassment? or tracing those who are liable to tax, but do not pay tax. How will that be done?
An indication can he had from what the Finance Minister said at the launch of the website 'Operation Clean Money', a programme to bring illegal wealth to account. He said on the occasion, "the fallout of the November 8 decision to demonetise higher denomination currency has increased digitisation of economy, brought more people under tax net and instilled huge fear of dealing in cash". Stating that an additional 91 lakh people have filed the I-T returns post demonetisation, Jaitley said he expects further increase in tax returns going ahead.
Time will tell if the strategy works, or will the talented innovative Indian find another way to save money for a rainy day, which is his natural inclination, by dodging the tax man?