Last week Income tax department has released the data of Income Tax Return Statistics for Assessment Year 2015-16 which is effectively for Financial Year 2014-15 i.e the first year of Modi govt. This data gives a lot of insight about the direct tax collections in India like which state contributes the highest, how many people paid tax, what is average tax paid by corporate etc etc.
This information has inspired me to write my 2nd article on direct tax (first one being here).
On 10th July 2014 when Mr. Arun Jaitley presented the first budget of Narendra Modi government he raised the personal income tax exemption limit by 25% that is, from Rs. 2 lakh to Rs. 2.5 lakh while he increased the investment limit under section 80C of the Income-tax Act by 50% from Rs. 1 lakh to Rs. 1.5 lakh. At that point of time this was taken as a return gift from Mr Modi on his resounding victory.
These were generous increase by any standard but larger question remains unanswered, WHY central government has not considered simplification of direct tax at that point of time. In 2017 Mr. Jaitley has appointed a committee to simplify the 56 years old direct tax laws to widen the tax base, ease of doing business & improving compliance.
If you ask any economist which tax is more regressive: Direct or Indirect, 99% chances are that they will say Indirect as this tax is same for all strata of society i.e they pay same rate irrespective of their income. Egs: The GST (an indirect tax) on soap could be 5%, the soap which is bought by the poorest as well as the richest. On the other hand direct taxes are progressive as they are higher for higher income i.e. 30% tax slab for income above Rs 10 lacs
But if you will ask common people in India they will say opposite. Everyone wants to pay less direct tax but more or less ok with paying indirect (sometimes hidden) tax as long as all others are paying. This underlying attitude is the reason for abysmally small number of direct tax payers in India. From a population of 1.3 Billion, only 40 million (4 Cr) paid Individual tax in 2014. We all know quite a large population of India is either below poverty line/below exemption limit or falls under exemption income like Agriculture but this still doesn’t justify Income tax filing by less than 5%.
From the 2014-15 data for Income Tax Returns of Individuals we can actually deduce that if Mr Jaitley had taken the decision of simplifying the personal income tax by increasing the personal income tax exemption limit while removing the exemptions, it would have been a great decision.
As per the IT data released, sum of Income tax payable was 1,88,031 Cr. Now let us consider 3 scenarios replicating the tax rates:
Scenario 1: 2.5 Lakh exemption limit & 1.5 lakh 80 C investment limit: In this scenario collection would have been 1,94,927 Cr. But since we have other than 80 C exemptions as well the actual tax payable, actual tax payable is little less i.e 1,88,031 Cr.
Scenario 2: 4.5 Lakh as exemption limit with 0 investment limit: Total tax payable would have been 1,87,735 Cr only 296 Cr less than what govt achieved during 2014-15.
Scenario 3: 5 Lakh as exemption limit with 0 investment limit: Total tax payable would have been 1,80,268 Cr only which means 7762 Cr hit on Govt finances.
Individual- Range of Tax Payable (AY 2015-16)
| Range | No. of Returns | Sum of Gross (cr) | Average Gross (lakh) | Scenario 1 (2.5L+1.5 L) | Scenario 2 (4.5 L+0L) | Scenario 3 (5L+0L) |
| < 0 | 1,08,062 | |||||
| >0 and <=1,50,000 | 21,60,364 | 18,289 | 0.85 | – | – | – |
| >150,000 and <= 2,00,000 | 15,61,078 | 27,860 | 1.78 | – | – | – |
| >2,00,000 and <=2,50,000 | 43,69,446 | 1,00,866 | 2.31 | – | – | – |
| >2,50,000 and <= 3,50,000 | 1,33,61,610 | 3,88,735 | 2.91 | – | – | – |
| >3,50,000 and <= 4,00,000 | 33,11,801 | 1,23,751 | 3.74 | – | – | – |
| >4,00,000 and <= 4,50,000 | 27,63,811 | 1,16,960 | 4.23 | 641 | – | – |
| >4,50,000 and <= 5,00,000 | 20,22,386 | 95,917 | 4.74 | 1,502 | 491 | – |
| >5,00,000 and <= 5,50,000 | 16,87,835 | 88,421 | 5.24 | 2,494 | 1,650 | 806 |
| >5,50,000 and <= 9,50,000 | 61,40,397 | 4,28,653 | 6.98 | 30,467 | 27,397 | 24,327 |
| >9,50,000 and <= 10,00,000 | 3,02,399 | 29,467 | 9.74 | 3,172 | 3,021 | 1,435 |
| >10,00,000 and <=15,00,000 | 15,15,662 | 1,82,066 | 12.01 | 25,822 | 25,064 | 24,307 |
| >15,00,000 and <= 20,00,000 | 5,93,658 | 1,01,939 | 17.17 | 19,302 | 19,005 | 18,709 |
| >20,00,000 and <= 25,00,000 | 2,83,331 | 62,977 | 22.23 | 13,510 | 13,368 | 13,226 |
| >25,00,000 and <= 50,00,000 | 3,81,228 | 1,27,824 | 33.53 | 31,104 | 30,913 | 30,723 |
| >50,00,000 and <= 1 cr | 1,16,901 | 79,992 | 68.43 | 21,776 | 21,718 | 21,660 |
| >1 cr and <=5 cr | 55,331 | 1,00,179 | 181.05 | 29,002 | 28,975 | 28,947 |
| >5cr and <=10cr | 3,020 | 20,323 | 672.95 | 6,040 | 6,038 | 6,037 |
| >10cr and <=25cr | 1,156 | 16,862 | 1,458.65 | 5,037 | 5,036 | 5,035 |
| >25cr and <=50cr | 233 | 8,114 | 3,482.40 | 2,430 | 2,430 | 2,430 |
| >50cr and <=100cr | 58 | 3,873 | 6,677.59 | 1,161 | 1,161 | 1,161 |
| >100cr and <=500cr | 31 | 4,175 | 13,467.74 | 1,252 | 1,252 | 1,252 |
| >500cr | 1 | 721 | 72,100.00 | 216 | 216 | 216 |
| Total | 4,07,39,799 | 21,27,964 | 1,94,927 | 1,87,735 | 1,80,268 |
Obviously changing the tax laws can have both positive as well as negative consequences.
The positive impact is mainly convenience to general public. Tax laws are difficult to understand be it Direct or Indirect. People don’t understand why they need to invest first in PPF, NPS, ELSS, PF, LIC to save tax and why all of these have different lock-in periods. Moreover people have a genuine complaint that they should survive first or save? If someone is earning Rs 30000 per month in tier 2 cities then probably average saving would be 5000/month. But to save tax he needs to invest all his money for some years and survive hard times to see that invested money.
With increasing limit obviously tax base which is already 1.7% will reduce further. With a flat Rs 5 lakh exemption limit we would have only 1.1 Cr Individual tax payers in India. This goes against the general rule of having a bigger tax base. Also the starting tax rate would be 20% instead of 10% (5% now) which could further increased tax evasion cases.
The challenge still lies to find the equilibrium between the positive and negative scenarios which I will explore in my next article.