Vol. XLIII No. 15 April 14, 2019

Tax Revenues: ‘Direct’ Action Needed

Surajit Mazumdar

IN election season, when political parties are seen to be making promises that would involve a commitment to governments making expenditures later, a question is often posed whether the country can afford such a ‘burden’. Those who pick this specific criticism among the several possible reasons that could be advanced against what is being offered, of course, are not in favour of any significant stepping up of public expenditures and effectively assume that the resources that the government can command are not amenable to increase. However, India’s tax-GDP ratio (central and state taxes combined) has been stuck at around 18 per cent of GDP for a long time – which is extremely low by international standards. Moreover, two-thirds of the revenues come from indirect taxes, in complete contrast to the more common pattern of heavy reliance on direct taxes associated with a high tax-GDP ratio. Of course, most Indians do not have incomes high enough to pay direct taxes. That, if any, is however even more of a reason for why revenues should depend less on indirect taxes which tend to make the tax structure regressive. Moreover, the evidence clearly indicates that direct tax revenues in India are far below the potential.

For the financial year 2016-17 (assessment year 2017-18), the last year for which such figures have been released by the Income-Tax Department, at least 4.99 crore entities filed returns with the income-tax department through which they reported an aggregate annual income of Rs 42.98 crores. Of these entities, almost 4.67 crores (or 93.5 per cent of the total) were individuals – making up only 3.6 per cent of the Indian population and representing for sure less than a sixth of all households in the country. Among the rest, HUFs filed 10.71 lakhs of the returns while firms and companies accounted for 11.05 lakhs and 7.92 lakhs respectively.

The reported income of Rs 42.98 crores was equal to almost 32 per cent of the aggregate national income of the country in that year. This being the share of only the declared income, it provides an indication of how large the base for direct taxation in India actually is despite low representation of the populace in it. The tax liability on this income in 2016-17 was, however, just 7.18 lakh crores or 5.7 per cent of the national income. The quantum of the declared income in one year alone itself being more than two and a half times the total currency with the public, also shows how ridiculous was the assumption underlying the note ban, that which was announced in the second half of that same year.

The case for not levying a higher tax burden on the incomes of those filing returns becomes even weaker when we consider the distribution of the income within them. Highly skewed distributions characterise these, whether we look at business incomes or salary incomes – the two main sources which account for 49.7 and 37.1 per cent respectively of the total declared income.

Business incomes were earned and reported in 2016-17 by all the different types of entities – some 2.23 crores in number. More than 2.64 crore individuals did not report any business income while 2.33 crores did not report any salary income – in other words, there was very little overlap between salary earners and those earning incomes from business activities. However, almost 55 per cent of the business incomes were reported not by individuals (or HUFs and firms) but by the 7.92 lakh companies. A mere 271 within them accounted for a whopping 56.6 per cent of this business income of all companies or nearly 31 per cent of all business income. Another 923 earned 16.8 per cent of all company business income or 9.2 per cent of the total. Thus, less than 1200 companies out of 7.92 lakhs (or 0.15 per cent of them) accounted for over 73 per cent of company profits and 40 per cent of all incomes from business. This represents a very high level of concentration of business earnings.

Even if one looks at business incomes reported by non-corporate entities, there is a fair degree of concentration. Among individuals, only 29 lakh odd or less than 15 per cent of those declaring a positive business income reported an annual business income of over Rs 5 lakhs – accounting for over 40 per cent of the total business incomes of individuals. Among HUF’s, only 77,524 (just over 7 per cent of their total number) and among firms only 1.77 lakhs (16 per cent of all firms) reported annual business incomes above Rs 5 lakhs. Of course, it is very likely that in this category there is considerable concealing of incomes – and the fact that such a large proportion primarily dependent on business incomes report a monthly income of less than Rs 50,000 serves to confirm that!  However, there is no reason to assume that only those showing lower incomes conceal any part of their income.

The distribution of total salary income between the 2.33 crore individuals reporting such incomes of course are not amenable to the same level of concentration as business incomes. Even in their case, however, those whose annual salary earnings were over Rs 15 lakhs and ranged up to around Rs 15 crores, were 14.6 lakhs in number. They were only 6.3 per cent of the salary earners but accounted for over 29 per cent of the total salary income. Another 13.3 per cent of the salary income was earned by the 17.7 lakh individuals whose salaries were between 10 to 15 lakh rupees. In other words, those with monthly incomes around Rs 1 lakh or more, less than 14 per cent of salary earners filing returns, earned over 42 per cent of salary income.

All in all, it would appear that there is both a significant income base for direct taxation in India. The scope for it is not reduced but even may be enhanced because of the high degree of concentration in command over the incomes that command that base. Around 1200 companies and at best 70-75 lakh households (.03 out of the 27 crore households that make up the Indian population) account for the overwhelming share of the reported business and salary incomes in India. They would also be responsible for most of the concealed incomes too. Given these, and the fact that one of the functions of taxation and government expenditure is also to redress extreme inequalities produced by the working of the economy, surely there is great scope to do much better on the direct taxes front! Measures such as demonetisation and GST, however, only serve to obscure this reality by focusing attention everywhere else except the small proportion of the population that corners a disproportionate share of the income that is ultimately generated by the labour of millions of Indians.