Time to Re-jig our Tax Regime

The tax paying population in India is already low, and further relaxation in the tax regime together with our habit of evading tax will further shrink the tax base, leaving very little leeway for spending on the country’s development and security. Do we need to take up measures to rectify?

As many as 5.52 crore individual taxpayers filed their returns of income in the assessment year 2018-19 (financial year 2017-18), which was 18% higher than the previous assessment year. The figure of such returns for the assessment year 2019-20 (financial year ending March 2019) is 5.65 crores, which works out to 4% higher than the preceding year. Considering the approximate population of our country at 130 crores, the number of taxpayers accounts to about 3.9% of the population. The inference derived from this data is that the number of tax returns filed has improved, but the tax base compared to the huge population is yet miserably low. The painful thing is that a large number of zero tax paying people will further shrink the actual base of taxpayers. For the year 2017-18, as many as 2.02 crore individuals filed income tax returns but paid zero tax.

In addition to individual returns, which forms a sizeable proportion of the tax returns, other category returns like returns by partnership firms, companies, trusts, AOPs/BOIs, artificial juridical persons (temples etc.), total to only about 40 lakhs, and thus the effective tax-base still remains very low. The large scale loss of tax returns can be gauged from the fact that we have 8.6 lakh doctors in the country but less than half of them pay income tax. One in three chartered accountants, who advise other taxpayers, actually pay no tax themselves. While we have nursing homes in almost every street of our cities, only 13,000 of them pay tax, which happens to be even less than 14,500 fashion designers paying tax.

Declining kitty

The situation of tax returns will further worsen in the coming assessment year 2020-21 (FY 2019-20) and thereafter. This is due to the fact that in the FY 2019-20 budget, the threshold limit for tax exemption for individual income has gone up to Rs.5 lakhs. This will erase a significant number from the taxpayers’ list. The threshold limit was raised as per the liberal policies of the government to help people in the lower-income bracket. With clever tax plan16 ning, and after availing deduction under Section 80 C of the IT Act, even a person having income up to 6.5 lakh may not pay any tax. Along with the evaporating tax returns, the tax collection will also fall due to the new scheme of tax sales for individuals and a reduced tax rate for companies as per the 2019 and 2020 budgets.

The corporate tax rate has been reduced to 22% and for new manufacturing and power companies it has been reduced to 15% with a sole rider that specified deductions under the IT Act not be claimed. The reduced rate scheme with the rider is optional, but it is commonly believed that a large number of companies will opt for it. Similarly, the 2020 budget has prescribed a new optional scheme for individuals up to an income of Rs.15 lakhs. Individuals can now opt for lower tax rate slabs if permissible deductions are not claimed. Again this is a liberal approach of the government to help the middle class who do not make such investments in properties or investments linked under section 80 C. A rough estimate by the government says that revenue of Rs.40,000 crores will be lost in the case of individual taxation alone, as per the new scheme.

In the context of such declining tax collection, the Prime Minister recently mentioned that only 1.5 crores of our people pay income tax. He expressed his anguish giving the illustration of professionals who have shown an income of more than Rs.1 crore. He observed that though the number of taxpayers in this bracket was low, a large number of them purchase expensive cars and undertook foreign holiday travel. It is really ironical that the government wants to help the people by reducing tax rates, but the tax evaders and non-filers of returns do not want to change their bad habit of evading tax. People go on strike for more and more financial raises but they forget their duty of paying tax honestly and filing returns showing their true income.

‘The country has poor farmers and they have to be helped, and their modest income should not be taxed. But there is no logic as to why we should not tax the rich farmers. When a poor clerk working in a bank can be taxed, then why should a farmer having a Mercedes car not be taxed?’

Profligate spending

Along with the people, political parties are also to be blamed. They win elections by spending on populist measures like farm loan waivers, free electricity, free water, etc. Our small tax kitty is a precious fund with the government, contributed to by taxpayers, for careful spending for the development of the country. States and the Centre have to calibrate spending honestly. States also have a big responsibility, as 42% of the income tax collected by the Centre goes to them. We have to ponder as to how 130 crores of people can be looked after when only 1.5 crore people pay tax.

One very big problem faced by the country is the narrow tax base, while the country is big and there is a huge requirement of funds. We need a lot of money for the development of the country’s infrastructure. We require money for poverty alleviation programmes. We have to get the armed forces equipped with the latest equipment and hardware. The two most important reasons for our narrow tax base are: the selfish psychology of some of our moneyed people and political reasons since independence. We Indians think more about ourselves and less about the country. We are vociferous about our rights as we keep on demanding them from the country, but we never give attention to our constitutional duties of paying tax and filing tax returns. We tend to believe that tax not paid is income earned.

Society too does not look down upon tax evaders and thus it is also tacitly complicit in it. There is a belief that law enforcement agencies are too weak to catch the tax evaders, and if caught, their advocates can get the desired help from the courts.

Why not tax rich farmers?

There is a political reason for not taxing rich farmers. The country has poor farmers and they have to be helped, and their modest income should not be taxed. But there is no logic as to why we should not tax the rich farmers. When a poor clerk working in a bank can be taxed, then why should a farmer having a Mercedes car not be taxed? A recent data of the tax department shows that there are 2746 cases where agricultural income is over Rs.1 crore. The time has come to correct this historical wrong.

‘Un’charitable Trusts

Our income tax exempts public charitable trusts from taxation with some prescribed conditions. There is nothing wrong with this as the country needs more schools, colleges and hospitals. But where is business conducted without payment of any tax? It is common knowledge that trusts are opened to serve as conduits to avoid tax by some big business houses. Yes, there are also respectable business houses doing good charitable work, while there are also a large number of shady trusts being used to push money for terrorist activities. These trusts, operated by anti-social people and funded in many cases by sources in foreign countries, are also not paying tax, as they are labelled as public charitable trusts. We all have to work hard to see that these shady trusts come under the tax net and they should also be punished for criminal activities if any.

More teeth to the law

Our tax enforcement agencies should be extra efficient to catch evaders. Our tax laws should get more teeth, so as to enable the department to send tax evaders to jail. We should have special courts for tax and economic frauds so as to limit litigation time. Speedy justice and quick sending to jail should be the objective so as to have a demonstrative effect on tax evaders. People today are not scared, and hence there is large scale tax evasion. Whether you call it ‘inspector raaj’ or ‘police raaj’, fear has to be induced in the minds of tax evaders if we really want to solve the prob-lem of the narrow tax base. Sometimes bitter pills and painful surgery are required to cure a patient of a dreaded disease

Tax lavish spending

We all know that to some extent the tax evaded money goes into conspicuous consumption. People do not file returns of income but buy luxury cars and go on foreign travel. The government may consider a levy of expenditure tax on the spending of conspicuous consumption. This scheme should be only for non-filers of tax returns. The objective should be to reach the doors of non-filers of returns from their back door, because they fail to use their front doors to reach the tax department as per their constitutional duty. The Budget 2020 has proposed similar legislation, as a provision has been introduced for tax collection at source (TCS) on payments to tour operators. The TCS has also been proposed on money sent abroad under the liberalised foreign exchange remittance scheme. The objective behind TCS is to have a tax-trail against such payments.

The problem of the small tax base is serious and it requires urgent attention from all stake holders. You may hate tax but it should be kept in mind that taxation is the price which civilised communities pay for the opportunity of remaining civilised, as said by Albert Hart.