The Income Tax department has just released new data on its direct tax mop-ups for assessment year 2015-16. Every time new data becomes available on the subject, it is used to reinforce the impression that Indians love to skip their taxes. But an objective analysis suggests that the despondency is overdone.
If filing an income tax return is a sign of voluntary compliance with the country’s tax laws, then India has been registering very material improvement in this metric in recent years. The tax administration has recently begun sharing data on ‘Income Tax Return Statistics’ for each assessment year. The series flagged off in financial year FY12 (equating to assessment year 2012-13) and is updated until FY15 (assessment year 2015-16).
It shows that the number of valid income tax returns filed rose by a good 40% from 3.11 crore to 4.36 crore between FY12 and FY15. Those return filers comprise individuals as well as other taxable entities such as Hindu Undivided Families, firms, companies and non-profit organisations. The number of individuals filing a tax return showed equally impressive growth from 2.87 crore to 4.07 crore.
In effect, the number of I-T return filers in this period grew far faster (12% a year) than India’s population (estimated at 1.2%). This could partly reflect the demographic shift which is underway, where the working age population is expanding faster than other demographic segments. But it also reflects a culture of improving tax compliance.
Talking of compliance, there’s brisk growth in the income that assesses are declaring to the taxman too. The total income reported in these returns (Returned Income) vaulted from ₹15.6 lakh crore in FY12 to ₹29.5 lakh crore in FY15, an 89% jump. Has demonetisation improved these metrics? Difficult to say. While many piecemeal data points on tax filings have been bandied about by the government this past year, official CBDT data that is comparable isn’t available beyond FY15.
Low income, not evasion
Sceptics point out that while the number of tax returns filed may be growing, a good number of those return filers don’t cough up any tax. True, of the 4.36 crore return filers for FY15, as many as 1 crore declared income below the taxable threshold of ₹2.5 lakh. But this doesn’t necessarily prove deliberate evasion.
It may only go to show that a majority of Indian workers don’t yet earn an income reasonable enough to fall into the tax net.
The Economic Survey 2015-16 made the point that India’s tax slabs are set rather high because individuals earning ₹2 lakh-plus make up the top 5.8% sliver of the population. A recent Credit Suisse Global Wealth Report calculated that the median wealth of Indians stood at just ₹84,175 ($1,295) in 2017. Given that an individual’s wealth is expected to be many times his annual income, this data supports the view that a majority of Indians don’t pay income tax simply because they don’t earn enough to do so. As India’s economic prospects improve and lift aggregate income levels, a larger slice of the population may graduate to paying income tax. In fact, this trend is already underway. Between FY12 and FY15, the number of returns with income below ₹2.5 lakh shrank from 1.55 crore to 1 crore and those in the ₹2.5- ₹10 lakh bracket jumped from 2.08 crore to 3.02 crore.
Not-so-narrow tax base
Commentators complain that India’s direct tax base is woefully narrow, with just 2-3% of the population filing returns. But to correctly assess India’s direct tax base, the ‘number of effective assessees’ is a better measure than I-T filings data.
What’s the difference? Well, in India, a large number of citizens contribute to the tax kitty by way of Tax Deducted at Source (TDS), but skip filing their IT returns. This could be because TDS is compulsorily deducted without an actual tax liability.
Or it could be that people find the paperwork too cumbersome. Including the TDS and other direct tax payers, the ‘number of effective assessees’ has jumped from 4.72 crore in FY12 to 6.26 crore in FY16, CBDT data shows. So, if you consider anybody who forks out a direct tax as a part of the tax base, it would stand at 6.26 crore. That’s not a bad number.
In India, a straight-forward comparison of the number of taxpayers with the total population count is a flawed measure of tax compliance, because only workers who earn income from taxable economic activities, are legally liable for income tax.
Census 2011 data tells us that only about 40% of the Indian population was employed for whole or part of the year. It is estimated that agriculture, income from which is tax-exempt, accounts for nearly half of the workforce. Therefore, if one attempts a ballpark calculation and excludes agriculturists and the unemployed from the total population count (estimated 132 crore for 2016), there would be roughly 26 crore taxable income-earners in the economy.
Of these, 6.26 crore pay direct taxes in one form or another. The number could still do with improvement. But it is certainly not cause to brand India as a nation of tax evaders!