Fact:
- 4 % of total adults (enumerated in 2011 census) paid tax in 2012-13.
- Data released by the income tax department of India is showing that the revenue from direct tax is declining and indirect tax is increasing in past years
- The share of the top 1% of the population in the country in the total national income is up to 13% for 2012
Why low Tax/population ratio in India?
- Lack of Government efforts on widening tax base as it concentrated more on increasing tax money.
- Most of the Indians still dependent on agriculture which makes most of them out of the purview of tax slabs
- India has around 90 % in to informal and unorganised sector which are outside the tax administration.
- Complex tax system
- Lack of proper tax administration to identify the tax payers and tax evaders
- 25% people are BPl. They simply can not pay tax.
- According to Tax Administrative Reforms Commission there is complete absence of economic, statistical, behavioral, or operations research-based analysis of policy or of taxpayers prior to making major or minor legislative or subordinate legislation-based (rule-based) decisions
Limitations of Indian tax structure which result in tax evasion:
- High rate of taxation.
- Failure to curb bribery.
- Lack of simplified procedures.
- Existence of large number of taxes.
- Complex tax laws and loopholes in the existing taxation policy.
- Lack of unorganized and systematic administrative structure.
- Deficiencies in implementing penalty provisions.
Why this ratio is important?
- Dependency on indirect taxes:
- The paucity of direct taxes means there is a dependence on indirect taxes that are considered to be regressive rather than progressive. They put a higher burden on the poor.
- In 2015-16, direct taxes contributed only 51 per cent of the tax revenue, lower than in recent years (and even the government’s expectations) and the lowest since 2007-08.,
- The Indian state will be fiscally constrained with inadequate direct tax collections
- An uncomfortable position for an economy steadfastly trying to scale up social and infrastructure investments while maintaining a semblance of fiscal discipline. Maintaining fiscal discipline hinders public investment
What needs to be done?
- Introduction of Goods and Services Tax (GST) is expected to widen the tax base, lower tax rates, increase the compliance level and generate more revenues.
- The focus has to remain on widening the income-tax base, and recent efforts to phase out exemptions must be speeded up
- Reform like taxing large farm incomes and rationalising tax-breaks enjoyed by the well-off, to widen the base.
- The streamlining of various data sources already accessible to the government must be carried out through cross-checking of information from various sources. Using big data techniques, multiple streams of data can be mined for individuals who have consistent spending patterns in excess of their declared income. This will allow for more focused audits
- Recognising and rewarding honest tax payers:
- A few benefits, such as priority in getting or renewing passports, driving licences or extra facilities at airports, should be offered to those paying taxes beyond a certain limit.
- Some other benefits like getting additional points during admission of their children to schools and colleges, or other government institutes or engineering colleges, etc., will also work well in creating an environment for increasing the compliance behaviour,
- GAAR and direct tax code need to be passed soon
- Proper tax governance by implementing the recommendation of Shome panel for merging CBEC and CBDT
- Curbing black money, by increasing the use of electronic money so that there is transparency in money transactions.
- People have to be educated that keeping their money in the bank is itself a great service to the nation.
- The Tax Administration Reform Commission (TARC) need to be implemented
Conclusion:
For a country like India, which needs to spend on health, education and social security and also build social and physical infrastructure, it is critical to address the challenges on the tax policy front swiftly. These include both the widening and deepening of the tax base, whittling down of exemptions and improving compliance, especially by leveraging technology.
Related Notes: