While the nation’s attention is riveted on how state governments are causing the GST rate to spiral by not increasing the tax base sufficiently, the Tax Administration Reforms Commission (TARC) has said the same problem of the low base applies to direct taxes as well. Given that India has a population of 120 crore and 17 crore permanent account number (PAN) holders, TARC argues it cannot possibly have just 3.5 crore income taxpayers—indeed, while the Central Board of Direct Taxes (CBDT) targeted a 15% growth in the number of taxpayers, it achieved a mere 1.5% annually during the period FY07 to FY11. The TARC’s maths is simple: if you assume that around half of India’s 24 crore families are below the tax bracket due to being poor or not earning enough, that still gives you 12 crore potential taxpayers; assume half of them are agriculturists, that still leaves you with 6 crore potential taxpayers. The TARC report addresses itself, as it should, to find ways to get this potential tax base. Putting in place a presumptive tax for certain categories of taxpayers—kirana shops for instance—is a good idea as it also insulates small taxpayers from the hassles of maintaining detailed income statements.
There are, though, some obvious problems with the TARC recommendations. Bringing back the fringe benefit tax (FBT) is one of them, as is the one to bring back the banking transaction tax. While FBT was a big source of harassment when it was in place, it is not clear why a tax needs to be levied in order for the taxman to be able to track ATM transactions. And while a tax on the super-rich will go down well with the political class, as the data the TARC has used itself suggests, there is no real call for this. For one, while 90% of the taxpayers in FY12 reported an income of under R5 lakh, they paid just 10% of the total tax collections; those showing an income of over R20 lakh comprised 1.1% of the tax base but paid 63% of the total tax. While it is no one’s case the poor should pay as much tax as the rich, the data suggests the real evasion is in the middle income groups—TARC itself refers to the Vijay Kelkar report that described this as the ‘missing middle’ phenomenon. If anything, as the Brazil example given by TARC shows, India’s problem is the top tax bracket kicks in at a relatively low level of income.
TARC does a good job of pointing out that, were India’s large tax giveaways—20% of direct tax collections in FY12—to be phased out, the tax-to-GDP levels would rise dramatically as this will make tax monitoring easier. A larger point TARC repeats is of the taxman using his data more effectively to identify non-payers instead of today’s crude search-and-seizure methods. As former finance minister Yashwant Sinha put it in a budget speech, tax collectors should gather taxes in much the same way a bee gathers nectar, without disturbing the petals.