Economic Highlights

New Delhi, 14 December 2012

Personal Income Tax

TIME TO DO AWAY WITH IT

By Shivaji Sarkar

It is time for India to take a fresh look at its personal income tax policy. For decades the number of tax-payees remains a meager about 2 per cent of the population. But the entire exercise entails huge expenditure on the part of the Government. The nation will do well if it considers doing away with its policy and save in terms of money, expenses incurred and time spent by the Government and individuals in filing tax returns.

Additionally, the procedure has a cost on other paraphernalia such as banking and related systems. If the cost of collecting taxes from individuals – whether it is employing people for assessing taxes for the purpose of tax deduction at source (TDS), depositing the amounts in the I-T department’s coffers and subsequent queries emanating-- are included the cost of paying tax would be more than the Government earns from the salaried class at the least. In fact, the Government may lose around Rs 1 lakh core in taxes, but eventually may save over Rs 1.5 lakh crore in expenses.

Every year-end, the Government comes out with figures on the people evading taxes. It goes without saying that those who know the law also know how to dodge it. Thus, according to Government statistics well-heeled professionals like chartered accountants, doctors, lawyers, big shopkeepers and wholesale traders, who make the category of income tax assesses, contribute nothing to the national exchequer. A nation of almost 125 crore people has only 14.68 lakh of these professional listed as tax-payers.

Over half of India's 3.4 crore income tax payers contribute insignificant amounts as tax, with figures in most cases ranging from a paltry Rs 50 to Rs 5,000. This reduces the effective tax base to around 1.5 crore tax payers, which includes mainly corporate houses and the salaried class, according to senior officials of the I-T department.

They are of the view that the cost to the department for maintaining these files would probably exceed the tax collections within this category. While even the figure of 3.5 crore income tax assesses is considered small for the size of India's urban population, the fact that the number of effective tax payers is less than half this number makes matters even worse for resource mobilisation.

Therefore, I-T raids are justified to effect collections in hundreds of crore. But has anybody calculated the cost of conducting raids? These do not include costs of the I-T department alone but also the huge expenditure incurred by the police and other departments. In many cases, as was seen in some premises in Noida, Uttar Pradesh, and other industrial centres across the country, the raids yielded precious little though it mounted expenses on the I-T department.

Gross collections of personal income tax “jumped by 15.78 per cent”, says the department to Rs.108,569 crore till November 2012 as compared to Rs.93,769 crore in the corresponding period of last year. For years’ together total I-T collection from individuals remains around Rs 1 lakh crore. It follows a long scrutiny of accounts and also entails a huge refund. The cost again is borne by the department.

Other than this the assesses too incur costs by way of having to take out time in their offices and also spend time in the I-T offices, at the cost of their productive time. The loss to the nation in this regard too will be more than the tax collected.

Sadly, the Government has not learnt from past experience. Recall that a few decades ago radio owners had to pay a licence fee. However, it dawned on the Government later that it was spending more than what it collected in fee and therefore decided to do away with it.

Similar is the case with personal income tax. It is helping none. By and large average Indians earn anything between Rs 5,000 and Rs 10,000 a month, which is often the family income. Besides, there would be less than five per cent who earn more than Rs 20,000 a month. Further, a miniscule percentage is earning over Rs 50,000 a month – Rs 6 lakh a year.  But they lose over 20 per cent of their income in taxes. That brings their effective income to around Rs 5 lakh a year as the tax component is around Rs 1 lakh.

With inflation at an average rate of 10 per cent, it severely affects their purchasing capacity. This has a cascading effect on industrial and manufacturing production. The Government often tries to bridge this by giving stimulus i.e. concessions to industries. Thus, it would not be wrong to say that a poor man’s loss is big industries’ gain. And, even if the personal income tax is done away totally for the highest slabs, the Government would only notionally lose around Rs 1 lakh crore annually.

It would also entail savings on government expenditure – be it on the number of employees of the I-T department, their often unproductive scrutinies and expenses conducted on raids. This would make up for the losses. Even otherwise the paraphernalia employed to extract tax from a mere 1.5 crore – in reality less than one per cent of the population-- is grossly disproportionate.

It would also save millions of rupees spent on these assesses on hiring chartered accountants as not many can file the complicated I-T files on their own. Each assesse would thus not only save on paying taxes but also on working out methods of keeping it low. Moreover, a mere 1.5 crore assesses would be contributing more to the development of the country.

In direct tax calculations, corporate tax is also included. For the present it may continue. Finance Minister P Chidambaram is almost at the last stage of his preparation for the next year’s Budget. If he shoves off a mere Rs 1 lakh crore on taxes and saves over Rs 1.5 lakh crore in Government expenditure, it would make good business sense. Besides, the extra money he would be able to shell out to the salaried class would lubricate the economy in more ways than one.

Clearly, the Government has to go beyond bureaucratic calculation of losses in terms of figures. Indeed, there may not be direct gains to the exchequer immediately but in the years to come it would offset all the supposed losses as it would also bring in more indirect taxes. Further, Chidambaram would not have to pay any stimulus to the industry but the money he would shell out through this move would boost economic activity.

Job generation would be a natural corollary.

Indeed, the world is looking at India to accelerate growth. Given the various arguments against the personal income tax policy, will Finance Minister consider doing away with it? If yes, then this one move is bound to create waves across the globe. More importantly, it would generate goodwill in the country, which he and his Government could do with. –INFA

(Copyright, India News and Feature Alliance)