Just one percent of population paid income tax: Is domestic tax evasion a bigger challenge?

The Government data on the income tax payments, released last week, throws light on one of the key problems India faces—painfully low number of income taxpayers as a percentage of total population. In other words, it shows a picture where tax evasion by individuals is so huge that it can create major impediments to a country, which strives to offer a social security net to its citizens, build quality public infrastructure and eradicate poverty.  The government has made public the income tax data for last 16 years. If one looks at the 2014-15 figure, just about 4.87 crore people filed tax returns, making it less than 4 per cent of the population (considering population at 125 crore). In the years before that, the number of those who paid taxes is even less. In 2012-13, the figure was close to only about 1 percent of the population. To be sure, the number of those who filed returns does not necessarily indicate the the number of actual taxpayers, since many of them would be below the threshold. What these figures effectively telling us is that the domestic tax evasion is an even bigger concern for India than chasing the black money stashed abroad. It doesn’t make sense for any government to chase a magic treasure hidden somewhere in foreign lands when there is massive scale of income tax evasion happening right under its nose. To put this in another way, the data is the testimony of India’s failure to broaden the tax net even though two decades have passed after the economic liberalization. There is a clear evidence here that a significant number of people who are  liable to pay taxes aren’t doing so. For instance, going by the government data, only about 11 lakhs people have admitted to have annual salary income of above Rs10 lakhs—clearly an absurd number. This spells out the big task Modi-government at this juncture—take steps to broaden the tax net rather than merely increasing the tax rates.

  Because, every time the government hikes the income tax rates but doesn’t bother to broaden the tax base, the burden falls on the chosen few, which is clearly unfair policy for any government to follow. Tax base can be broadened only by a slew of steps including bringing awareness and monitoring compliance at state-level. According to the published data, just two states, Maharashtra and Delhi, contributes more than half of India’s income tax payments.

The very low levels of tax compliance should worry the government since there is no ‘akshayapatra’ for it to source funds for its development work except the tax paid by its citizens and revenues mobilized from state-resources. While the proposed Goods and Services Tax (GST) will largely take care of the task of broadening the tax base on the sales of goods and services, increasing compliance on the income tax front, is a challenge.

The government has been taking measures to address this issue by proposing to deduct tax at source, using analytics to identify taxpayers and making PAN number mandatory, said Alok Agarwal, senior director, tax practice at Deloitte. “The government has realized that income tax cannot be solely relied upon. The increase shown in the sales tax revenue is a proof of this,” Agarwal said.

  To put it in simple words, India still has several citizens who go out and buy expensive cars and jewellery but are not willing to pay the taxes to government on the income they earn. They, who would still seek more government-sponsored free-services and subsidies, do not spare time to think of how will the government actually raise resources to do all these.

The bottomline is this: we are all more than aware about what is due to us as the privileged citizens of this country, but conveniently forget what we owe to the state. The sad fact is that all of use are too used to the freebies. It would be ideal if the awareness come from the citizens rather than imposed by the state–particularly in a scenario, when the state exchequer is in deficit mode. (Data Support from Kishor Kadam)