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ITRs rising, but not tax collection Did cash ban help raise tax base?
September, 24th 2018

Income-tax returns (ITRs) have seen a surge post demonetisation and GST introduction, and the government claims these numbers suggest a surge in tax compliance in the country.

But available data show there has not been a commensurate increase in tax collection.

Analysts say using rise in ITRs to deduce an increase in tax collection is fraught with risks, and tax sleuths may be falling for the correlation-causation fallacy.

“It may be possible that people who paid taxes earlier did not file income-tax returns. But after GST, one may have seen an increase in the number of ITRs filed, in which case there may not be a corresponding increase in tax collection,” Devendra Kumar Pant, Chief Economist, India Ratings and Research, told ETMarkets.com.

Broadly, the narrative has been an optimistic one. According to Crisil, direct tax collection soared post 2016 because of demonetisation, as seen in a significant jump in the number of new income-tax filers. But a report by SBI Economic Research talked about an additional tax revenue of only Rs 30,000 crore that flowed in from a wider taxpayer base.

The Economic Survey 2017-18 said this was the result of scrapping high value notes in November 2016. According to CBDT Chairman Sushil Chandra, the taxpayer base widened to 6.26 crore in 2016-17.

Even DTB (direct tax buoyancy) -- another tool to examine tax efficiency -- does not give the whole picture, as it takes into account only direct tax collection, which has been on the rise, demonetisation or not. "Direct taxes have grown even in the worst of times, like the global financial crisis of 2008," Pant said.

India’s direct tax collection grew 6.20 per cent to Rs 3,33,818 crore in FY09, from Rs 3,14,330 crore in FY08. It stood at Rs 7,42,295 crore in FY16, Rs 8,47,000 crore in FY17 and Rs 9,95,000 crore in FY18. India had 4.07 crore income-tax filers in FY16, which grew to 6.84 crore at the end of FY18, according to government data.

DTB signals efficiency and responsiveness of revenue mobilisation proportionate to economic growth.

Somnath Bannerjee, Managing Partner, ASK Wealth Advisors, told ET: “Calendar 2016, the demonetisation year, marked the trend-break. Two years later, DTB is back near 2. In other words, the government is collecting more direct taxes despite absolute rupee incomes growing at a fairly modest (by historic comparisons) level.”

But reaching a conclusion on the basis of buoyancy is "a very dangerous thing to do", adds Pant. "The tax buoyancy has been seeing a fluctuating trend in the past 10 years. One can say the current rise in DTB is because of demonetisation. Calendar 2017 was bad, as the economy was recovering from demonetisation, coupled with base effect. Calendar 2018 would show bumped-up numbers. Chances are the 2019 numbers may be low. So, DTB alone is not sufficient to judge tax collection," he cautioned.

So, what's the missing piece in the jigsaw? The answer is tax-to-GDP ratio, a measure that maps tax collected by the government in relation to the country's GDP.

When used in combination with ITRs and tax buoyancy, this measure is a true reflection of the state of affairs.

Tax-to-GDP ratio takes into consideration total tax revenue collected in a year. Its importance was emphasised by none other than Finance Minister Arun Jaitley, who had earlier made out a case for this figure to go up by another 1.5 percentage points to improve tax efficiency.

how much India has to cover in the days ahead. According to official data, India’s nominal GDP growth was 10.86 per cent in March 2018, down from 11.01 per cent in December 2017.

Rising ITRs and direct tax buoyancy may paint a rosy picture. But they do not really say much. The real giveaway is the low increase in the tax-to-GDP ratio, which suggests tax collection has not really been up to the mark.

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