The government has released income tax data for the first time which PM Modi categorized as a big step for transparency. Indeed it is. The 84 page document covers (1) PAN allotment statistics for FY2014, (2) a time series data from FY2001-15 and (3) detailed statistics for AY 2012-13.
The data points to the well-known fact that a miniscule percentage of our population pays income tax. The data highlights a number of interesting facts which government needs to work upon to improve tax collections and tax efficiency.
How can govt. boost its direct tax collections? One way is to broaden the tax base. However, this would mean taxing agriculturists as well which is a politically sensitive decision. Another method is to increase tax collections from the very people who have filed returns by plugging loopholes (there are many as we will see below). Filing returns doesn’t necessarily mean, people have declared all income and paid all taxes. This can be done by analyzing and cross checking returns data filed with other govt. data available.
Major Finding: Contrary to numbers being put out in the media, it is important to note that 20% of eligible Indians have actually filed returns in 2012-13. This is calculated on the base of workers who are not in the agriculture sector. While 20% is not a large number, it is definitely much higher than the single digit numbers being put out in the media.
Let’s take a look at Top findings:
1. Personal Income Tax collections have lagged Corporate Tax collections pointing to huge tax evasion and domestic black money
Corporate tax and Personal tax collections were almost at similar levels in FY2001 (Rs. 35,696 crores vs Rs. 31,674 crores), gap of only Rs. 4,000 crores. In the last 15 years, while corporate tax collections have grown at a CAGR of 20%, personal taxes have grown only by 17% p.a. This has skewed the 51-42 ratio in FY2001 to 61-39 at present (FY2015).
While corporate tax collections have remained buoyant, this trend points that not enough jobs have been created, leading to increase in no. of self-employed / professionals vis-à-vis salaried class where tax collections are low.
2. Classic Debate Back – Salaried individuals report more income than Self-employed / Professionals and pay more tax
Salaried class has always complained of lack of parity vis a vis corporates and self-employed / professional class who get to deduct all expenditure incurred in earning income before paying taxes. Average reported taxable income of salaried individuals for AY2012-13 was Rs. 5.37 lakhs vs Rs. 2.67 lakhs of self-employed / professionals. Hence tax paid would also be higher though separate data not available. This also leads to low effective tax rate of individuals mentioned below in point no. 6.
3. Top 2% of corporates pay 92% of total corporate tax, Top 2% individuals contribute 30% of total personal tax
While it is widely acknowledged that a few individuals pay bulk of the personal income taxes, the situation is more lop sided in the corporate sector. Only 2% of companies account for 90%+ of total income tax, the corresponding number for individuals is just 30%. While it does point out unequal distribution of income among individuals it also points to the poor state of financial health of our corporates.
2.3 lakh companies out of 6.35 lakh (36%) which file returns report losses (negative income). Another 1.02 lakhs report zero taxable income. This doesn’t speak well of the financial health of our corporates. Companies making losses are a burden on the economy. While some may genuinely be making losses, others inflate expenses to reduce income and hence tax burden.
Further, all corporates in India are not filing returns. There were 10.17 lakh active companies in India as of Feb. 2015, however, only 70% of them appear as effective assesse in data released. Where have the balance gone? Are they operating in black and no white money? Have they closed, then ministry of corporate affairs data needs to be adjusted.
4. A third of effective assesses don’t file returns
There were 4.72 crores effective assesses as per data released for AY 2012-13 but out of this only 3.11 crore filed income tax returns. 34% of total assesses do no file returns. This number is pretty huge and would also include cases where tax has been deducted at source from the income of the taxpayer but they have not filed returns. This is the highest for AOP / BOI and Govt. / AJR / LA / Trusts categories and the lowest for corporates. These assesses need to be tracked (IT department has their PAN Nos. and addresses) and asked to file returns, hopefully adding to the tax collections.
5. More than half of returns show zero tax liability
Out of 3.11 crore tax payers who file income tax returns, 1.71 crore (56%) pay zero taxes. They file income tax returns to stay complaint and use it for processing visa / loans / other purposes. Again here AOP / BOI tops followed by Govt. category. Can’t do much on this, apart from ensuring that they are not evading taxes.
6. Effective Tax Rate comes to 20%
The effective tax rate (tax payable divided by returned income) for the whole lot of taxpayers is 20% in AY 2012-13. While it is 33% for corporates (in line with the tax rates), for individuals it is very low at 10%. This is due to the low average salary levels which attract lower rates and also the fact self-employed / professionals get to deduct all expenses before arriving at taxable income as described above in point no. 2.
7. One-fifth of Direct Tax Collections is Un-accounted for
In FY12 Rs. 493,987 crores of income taxes were collected by government but the data for AY 2012-13 shows that all IT returns filed aggregated to only Rs. 389,577 of taxes. So where did this Rs. 100,000+ crores of taxes come from, who all paid these. A portion of this could pertain to TDS income. So there are assesses who have earned income, people have deducted tax and deposited with govt., but these assesses have not filed income tax returns. Do all of them have income in the exemption list category? Why haven’t they filed return? Have they evaded taxes and need to pay more taxes? Has I-tax department gone after these people? These are some of the questions which need to be answered.
8. Interest income reported by all assesses is way below interest paid by all commercial banks
For AY 2012-13, all returns filed show a cumulative income from interest of Rs. 85,591 crores. If you cross check this with the total interest paid by commercial banks in India on deposits this is less than 40%. (In FY2011, banks paid Rs. 230,189 crores of interest on deposits, this would have increased in FY12, data NA). So there is some under reporting here, though banks here would have normally deposited TDS on the same as well.
9. Only 15% of PAN card holders file returns
As of Feb. 2016, 24.38 crore PAN cards were issued in the country. Compared to this there were only 5.16 crore assesses, and even less people (approx. 3.5 crore) filing returns. 27.64 lakh PAN cards were allotted to individual category in FY14 but number of individual assesses declined in AY 2014-15 by 4 lakhs. PAN Cards once doubled up as an identity card, now Aadhaar has taken over. The filing ratio is very low and needs to be improved over the next few years. PAN is not a credit card that you keep it in your wallet. It is specifically issued to track income / expenditure and should not be issued to people who don’t need it.
10. Assessment Disposals show another judiciary in the making?
In the last 15 years for which data has been released (workload section), 55.54 crore returns were filed, but only 34.12 crores were disposed of (61%). What happened to the rest? This shows that there is a big backlog of assessments not completed with the I-Tax department. Some of it could pertain to returns with zero tax liability and others where notices sent, but still it is an alarmingly high number.
11. Only 2 million Indians claim they receive any income from property
In the 2011 census, 24 million households were occupied by tenants. However, only 2 million claim that they are received any rentals. That is just 10% of the overall rental market. Even if one were to adjust this by urban (30%) and rural, only 28% of Urban India who are receiving rental income are declaring this to the Tax department. Currently property income comes to about Rs 29000 crores, in reality this could be as high as Rs 103000 crores or a net loss to the Government of about Rs 25000 crores
12. While 11.6 m Indians declared salary income, 15.7m Indians declared only business income
The annual survey of Industries (2012-13) shows 10 million Indians were employed by the Industry sector. Given that bulk of India’s employment outside agriculture is in the services sector, the number of 11.6 million is extremely low. What is fascinating is that more Indians have declared business income than salary income. It is unclear why this is the case but availability of gender data could have answered an important question on India’s low female work participation rates
13. Income equality is a problem
While tax evasion of all types is a problem, the tax payment data itself indicates that there are serious problems with India’s income equality. Census 2011 itself indicated this when only 12 million households (out of 246 million, 5%) reported having access to a car. The tax payment statistics show that 0.4% of main workers pay 80% of reported personal income taxes. While one could blame this on black money, when seen in conjunction with car ownership data indicates severe inequalities in the country
14. The Corporate and Personal Income Tax data reveals an interesting trend
While this data has been available every year, no one noticed an obvious trend
Every time there is a crisis, corporates first take care of themselves first and then employees. Look at Personal tax growth soon after the slowdown in 2001 and then again in 2008-09. For 2-3 years, businesses first took care of themselves before passing growth to their employees. The recent slowdown in 2013-14 was an exception in the sense that while personal income growth fell, it was not lower than corporate income growth.
To sum up, the I-Tax disclosure is a commendable step. However, such data for all years from 2000-01 should be released and in a more user friendly manner (excel) as pointed out by Vivek Kaul to enable quality research. There are enough pointers for I-Tax department to investigate as shown above – many assesses not filing returns despite income, many corporates not filing as well, interest income doesn’t tally with bank wide interest paid out, effective tax rate of individuals so low etc. Instead of chasing black money and tax evaders outside in foreign shores, focus should be on domestic black money and evaders inside the country. Within India, there are two kinds of black money and each need different solutions. The first kind of black money is the one created by politicians and government officials. This needs exemplary monitoring, arrests and conviction. The second kind of black money is the one created by individuals in order to evade paying task. As far as small businesspeople are concerned, GST is meant to touch atleast some of them. However, a vast number of small retailers, traders and others in unorganised sector are likely to be touched by GST. The second way in which the Government has been tackling this group has been by increasing indirect taxes across some consumption categories. This is a lazy way to raise taxes. Instead, the Government should find ways to start including each group into the tax system over time.
Certain lacunae also needs to be fixed – only 15% PAN card holders file returns & those who earn income below exemption limits also are not required to file returns. Only when all individuals / entities who have PAN cards and all individuals / entities who earn any sort of income (regardless of exemption limits) file income tax returns this data will be more meaningful and make sense. This will lead to improved transparency and build a solid data base over years making tax evasion difficult. Well this may increase the cost of collection in the beginning, but will help to nab evaders and make up by increased tax collection.
Notes: AY – Assessment Year, FY – Financial Year, AOP – Association of Persons, BOI – Body of Individuals, AJR – Artificial Juridical Person, LA – Local Authority.