Revenue Generation: Expanding tax net imperative

Lack of adequate resources is a major impediment for a country like India which has to meet huge challenges of development. The government needs to seriously consider augmenting resource generation but without affecting the low and middle income sections and at the same time ensuring the pressure on the upper sections of society is not too much. An area which is not properly tapped is evolving ways and means of augmenting income tax payments, which has a large number of well-off professionals.

Recently, Prime Minister Modi rightly pointed out that the government was making a strong effort to make India a tax-compliant society. “In the past four-five years, a lot of work has been done but there is a long way to go”, he stated, while regretting the fact that though in the last five years, 1.5 crore cars were sold and over 3 crore people travelled overseas for business or leisure only 1.5 crore people pay tax. Modi echoed what has been stated by many economists that while the country has many lawyers, doctors and chartered accountants only 2200 professionals declared annual income above Rs 1 crore. And it is a nation of around 140 crore people.

It is well known that there are many teachers and professors as also doctors who just pay the income tax on the basis of their salary earned. Their other income – by private teaching in the case of teachers and professors and by private practice of doctors – is never reflected in their IT returns. This is also the case with lawyers, whether formally employed or not, who earn huge money through private consultation. But these professionals do not show even 50 per cent of their total income.

In the case of doctors, who are surgeons, the income comes to at least Rs 1.5 lakh to Rs 2 lakhs per month for those who are not very well known while for senior surgeons, the income may be around Rs 5 to 6 lakh per month. But most of this income is not reflected in their IT returns, thus depriving the nation of progressing at a fast pace in meeting the development challenges.

What’s even more striking is the fact that the number of tax payers has shrunk sharply in the past one year. Estimates show that in the assessment year 2018-19 (financial year 2017-18) 3.29 crore Indians paid income tax. Compared to that 1.46 crore taxpayers in 2019-20 represents a fall of 55 per cent in just one year. The question arises where did 1.83 crore income taxpayers disappear in one year? The answer possibly lies in the rebate offered to people with annual taxable income between 2.5 lakh to 5 lakh in the interim budget of 2019-20. The rebate ensured that income payers in this bracket did not pay income tax any more.

According to available data, close to 4.3 crore individuals showed taxable income up to Rs 5 lakh as on December 2019. These are income earners who file tax returns but show zero tax liability. In 2018-19, there were 2.2 crore such ‘zero tax filers’. Added to this, the number of tax payers with gross income of over Rs 5 lakh increased by a little under 4 per cent in 2019-20 from 1.43 crore in the previous year to 1.49 crore.  Thus honest taxpayers are made to share the tax burden of those tax evaders and tax avoiders.

It may be pertinent to mention here that the committee set up to review direct taxes suggested a 10 per cent personal income tax rate for those with annual incomes up to 10 lakh; 20 per cent for those with incomes over Rs 10 lakh and up to Rs 20 lakh; 30 per cent for incomes over Rs 20 lakh and up to Rs 2 crore and 35 per cent for incomes above Rs 2 crore. Unfortunately, there is no serious initiative to identify and apply innovative means to expand the direct tax net to rope those in those tax avoiding conspicuous consumers without adversely impacting the growing consumption trend.

Thus, there is a clear indication of the fact that there is tendency to evade tax among non-salaried persons. Way back in 2018-19, the Budget speech had noted that on an average a salaried person paid three times more income tax than a non-salaried taxpayer. Thus, the obvious challenge before the government is to ensure that the latter group is located and they are forced to pay tax.

The next question obviously arises how to locate these professionals and whether the IT department has the resources for carrying out this work. Though the government has been advocating the need for digitisation, this may not work to ensure that these professionals are forced to pay tax. Though getting hold of these professionals may not be easy but, to start with, the government may easily locate small business like promoters and contractors, architects, wholesale dealers and try to find out their actual income.

There is also need to appoint more inspectors and also appoint retired government officers in each locality – to start with in big metros and cities — to locate the tax evading persons. Even in rural areas, the process has to start. Also the penalty provision has to be strictly enforced and the amount of such penalty has to be increased. Monitoring has to be geared up for only then will revenue generation increase.

The process should start now and mere statements by political leaders in the media will not help. Efficiency and political will by the authorities would go a long way in ensuring good governance and this would be a significant step, if the government can take positive action in this regard. However, there has to be a close watch on corrupt IT officials so that they do not connive with unprincipled professionals to reduce their tax burden.

Thus the country’s wealth generation trend of individuals is hardly impressive. India boasts to be the world’s fifth largest economy in dollar terms after the United States, China, Japan and Germany but there is an imperative need to expand the tax net to meet developmental expenditure and check inequalities. A comprehensive strategy must be put in place.



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