Zero Loss, Zero Tax and the Contest of Flawed Narratives
India’s tax code is structurally flawed. Tax policies have been used for multiple objectives leading to exemptions, distortions and multiple failures.
By Shankkar Aiyar | Published: 02nd April 2017 04:00 AM |
The expertise of politicians on verbal calisthenics is no secret. This week, in Parliament, there was a display of calisthenics of the statistical kind.
Kapil Sibal, former Union minister, dived deep into the data set of Census to establish that the low count of tax payers is because many had no income. The effect was not very different from the impact of his famous defence of the 2G policy during the UPA regime.
The provocation was a statement in the 2017 Budget. Finance Minister Arun Jaitley said that Indians “are largely a tax non-compliant society”. Jaitley pointed out that “the number of people showing an income of more than ` Rs 50 lakh was only 1.72 lakh”, and contrasted this with the sale of 1.25 crore cars in five years and foreign travel by 2 crore Indians in 2015.
The answer to why India has a low count of tax payers can scarcely be binary. The issue is located at the intersection of a complex matrix of legal and socio-political realities.
The truism about India is that for every statement, the opposite is equally true. India boasts of over 50 billionaires on the Forbes Billionaires list. It is also home to nearly 300 million living below the poverty line.
The low count of tax payers in India owes its genesis to two principal factors. One is poor income levels — nearly 60 per cent of the populace is dependent on 14 per cent of the national income. Secondly, India is perhaps the only economy where 80 per cent of the workforce and over 45 per cent of the economy is in the informal sector — across 16 large states, only 5 per cent of all establishments host 10 or more workers.
The struggle to track tax dodgers dates back to 1947 — the first Income Tax Investigation Commission headed by Justice S Varadachari. Since liberalisation, the challenge had been to align collection of income tax with rising incomes visibly expressed in consumption.
The data on returns and collections illustrates the expectations paradigm. In 1992, the number of returns filed was 37.36 lakh. The number of returns for income above Rs 10 lakh: 2,321. In 2000, the number of returns filed rose to 1.42 crore. The number of returns filed for income above Rs 10 lakh: 78,109. In 2014–15, over 3.65 crore returns were filed. The number of returns with income of over Rs 10 lakh was 24.4 lakh and that over Rs 1 crore was 48,417.
In these 25 years, India’s GDP grew from Rs 5.86 lakh crore (or $290 billion) in 1991 to over Rs 130 lakh crore (or $2 trillion) in 2015, and the per capita income from around Rs 6,000 to over Rs 92,000 (or from $300 to $1,500). Successive regimes have correlated the GDP data, and that of consumption, with returns and collections and held it as an argument justifying the potential for higher realisation of taxes and a bigger number of tax payers.
Jaitley is not the first finance minister to lament about the gap between implicit income levels and explicit collections. In 1997–98, P Chidambaram bemoaned how in a country of over 900 million “only 12 million were assessed for income tax”. A year later, Yashwant Sinha said it was a matter of “great anxiety that the total number of assesses constitutes less than 1.25 per cent of our population.” The grief is about width and depth. In 2013–14, Chidambaram revealed that in a two trillion economy “only 42,800 persons admitted to a taxable income exceeding Rs 1 crore per year”.
There have been attempts to contain evasion. Manmohan Singh in 1995 introduced TDS on payments over Rs 20,000. Chidambaram used ownership — of homes phones, four-wheelers or foreign travel — to bring spenders into the returns net. Sinha added credit card ownership and club memberships and cast the net wider across 35 cities. Thereafter, PAN was made mandatory for buying property, shares, vehicles, fixed deposits and even bank accounts. Data was dredged from the Tax Information Network.
The lament persists; thanks to the structural and systemic issues.
Tax policies have been deployed to achieve multiple objectives — from savings to investments to behavioural change. This has led to a plethora of exemptions, distortions and multiple failures.
This had been identified by the task force on Tax Reforms headed by Vijay Kelkar as early as in December 2002. The task force had observed that the “myriad and often contradictory exemptions” have led to complexity and “such complexity is inherently regressive and therefore favours the rich and the powerful”.
The recommendations included doing away with the fog of confusion in exemptions, reducing compliance costs and harassment. The task force also pushed for a tax on agricultural incomes. Governments since have cherry-picked recommendations. The Direct Tax code, which promised the overhaul of the Income Tax Act, has been in the making for well over a decade.
The systemic approach has been typically more of the same — perpetual pursuit of the middle class, professionals and the salaried class. Logic dictates that the focus should be on those outside the tax net, outside the formal system, on the scourge of the benami economy. It would be interesting, for instance, to cross reference number of business establishments, number of new businesses, number of new cabs, and also consumption data from GST with tax returns a year from now.
Compliance is a loaded phrase and the political class must accept that the business model of politics fails the moral hazards test.
It is imperative that candidates and parties reveal where the money that they spend is coming from. The fear of political retribution does not preclude transparency in the US!
Above all tax compliance demands demonstration effect. It is not enough to say that the tax collected is allocated for progress. Governments — at the Centre and in the states — must produce outcome reports that present evidence that the hard earned monies of tax payers have been invested and have yielded results.
Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change