Taxing The Taxable
March 12, 2013
Is India really a poor country as it is made out to be, or one of the richest disguising as poor?
It is that time of the year again when we have to pay ugly amounts as tax to account for any shortfall that we may have had in paying taxes throughout the year. Honestly, a part of me hates it, and not only because it pinches my personal purse, but because there are many purses that continue to remain invisible to the Income Tax Department. Mind you I am not implying the super-rich.
Ever since we can remember, the Indian taxation system has been based on appeals to morality and "sacrifice" and on the Indian way about the need to tax the rich in India at a higher rate in keeping with the so called philosophy of the Welfare State. I say ‘so called’ because at the end of several decades, we have now started looking for the Welfare State, promised us by the Constitution of India, and which by definition, is a state that “strives to promote the welfare of the people by securing and protecting as effectively as possible a social order in which justice, social, economic and political, shall inform all the institutions of national life. In particular, the state shall direct its policy towards securing the citizens of both genders have the right to an adequate means of livelihood; that the ownership and control of the community’s resources are distributed so as to best serve the common good; that the economic system does not operate so as to cause the concentration of wealth to the common detriment.”
Analysts would have us believe that so far the taxation system has delivered this goal. Between 2002 and 2011, income per worker has gone up by 221 per cent, the income subject to tax has increased by a much larger 350 per cent, and the realized tax revenue has increased by a whopping 795 per cent. And the average tax compliance rate has doubled from 16.1 per cent in 2002 to 31.2 per cent in 2011-12. The definition of compliance here includes both the compliance in terms of the number of people who should be filing tax returns and are filing tax returns, and compliance in terms of income declared. Then how come we do not see manifestations of it in our day to day lives? How is it that the rich are getting richer and the poor are sinking into deeper abysses of despair? Perhaps, the 221 percent increase is inadequate in terms of affordability of the basic necessities of life, like food, shelter, clean drinking water and education?
The "official" numbers imply that in real terms only 2 per cent of the active part of India’s billions of population pay income tax and that the top 1.3 per cent of tax-payers accounted for “63 per cent of total personal income tax revenue- and paid an effective tax rate of 52 per cent, well above the statutory maximum tax rate of 30 per cent. For example, the top income category, those earning more than Rs 20 lakh, shows four lakh taxpayers paying an aggregate income tax of Rs 93,000 crore. This has an implied average tax per person of Rs 23.25 lakh.”
But should you believe these numbers? Common sense per se, if you do then you certainly cannot, and should not, be arguing for a tax rate hike, or a surcharge, on these super-rich one per cent. These high net-worth individuals are already paying for a higher fraction of tax revenue than in any other country in the world, developed or developing. In the US, the top 1 per cent pay "only" 37 per cent of tax revenue; in most countries the percentage is less than 30 per cent. Note that the top 10 per cent of taxpayers have a share of 27 per cent in Sweden and 31 per cent in Germany.
But if the average compliance rate is 31 per cent for those whose income is visible, then it means the tax administration is only collecting only a third of the actual taxes owed. If every tax-payer was an honest conformist, the total tax revenue in India in 2011-12 would have been Rs 5,51,000 crore, more than three times the actual collection of Rs 1,72,000 crore. How come two-thirds of the potential tax revenue is lost? Surely, this cannot happen without the full and enduring compliance on the part of tax administration officials, can it? How is it that ‘rich’ farmers are still not brought under the comprehensive tax bracket? How is it that the net-worth of political parties is not assessed for taxation? How is it that tax authorities do not think of looking into the ‘real’ books of accounts of the neighborhood ‘chai-wala’ or cigarette vendor, or that of self-employed tutors minting money at coaching centers? The argument sometimes given is that all these categories of people are in any case paying ‘indirect’ taxes in terms of VAT etc. But the argument is lame since for those of us TDS is a nightmarish term are also paying the same amount in terms of indirect taxes.
It is for this reason that middle-class common sense might prompt you to argue that there is need to look into not just tax collection but also tax administration. The last couple of years has seen a significant amount of concern on corruption in India. The middle class is no longer taken in with moral dictums about helping the poor and therefore the need to squeeze the rich. The new pragmatic middle class wants some answers to pertinent questions. For example, why is there such massive leakage in public distribution systems? When will there be better enforcement in this area? And if there are food subsidies for the poor, then how come they are dying of starvation and mal-nutrition even while food continues to rot cold-storages?
Let us all note that tax compliance in the US is well above 90 per cent. When we get even halfway to the tax compliance of rich countries, we can begin to talk about sacrifices and morality and fairness in tax systems. Until then, increase tax compliance. Many of us are living in the hope of seeing that happen.