Saumyen's Pages
Rethink
Symbiotic relationship to enhance tax collection
(February 2019)
Finally, this is in radar of the Government of India! The government is looking to put in place an incentive programme to reward and recognise the honest taxpayers to encourage a culture of compliance. A committee has been set up under Central Board of Direct Taxes (CBDT) to draw up the scheme and we hear the recommendations, hopefully, sooner than later.
Needless to say this is a welcome step as it also incentivises the tax payers – to boast of and show their identity in a different positive way in the society.
The entire mechanism of tax recovery by the Government has traditionally been based on compliance model with legal enforcement for defaulters. On the other hand, individuals like me (the salaried tax payers) pay taxes by reluctance and there are multiple reasons for our reluctance:
- We do not transparently see or relate to the translation of tax paid for development or more specifically benefits to tax payers
- We see passing of government benefits to some people who apparently do not deserve government support. For example, 88% of the Central Govt's subsidies arise on the provision of economic services - however, 10% on merit services and 78% on non-merit ones (Wikipedia)
- We witness the pro-poor agenda of the Government in schemes, propaganda, discussion and rightly so. But we do not see the recognition of the tax payers (that contributes 16% of government revenue) who make these schemes work - with equal enthusiasm
Moreover, the present government has been talking about the black money (i.e. money that illegally or manipulatively bypasses or conceals direct tax impact) since the start of the Party’s campaign for the last general election in 2014. The enormity of volume, intricate mechanisms of its creation and extensive penetration across the strata of society make it difficult for the government to address the issue - possibly at a speed that the country has been expecting from Mr Modi. I leave aside the debate around the political intent of the government for the time being.
But when we see around to find people like Mallya, Nirav Modi et al who exploit the financial institutions (and in turn, our money) to make illegal wealth and then effortlessly escape the country and challenge the ability of our legal system to bring justice, they often leave us - the tax payers, with agony and frustration.
Moreover, our democratic political fabric and uneven income distribution have helped the government to focus on the larger section of electorate (who are not concerned about or impacted by the income tax) and not to adequately focus on the sole interest of the smaller tax paying population. Recent spate of waiving (or electoral promises thereof) of farmer loans across multiple states only poorly reflects the unplanned expenditure for short-term political gain of the ruling parties and at the expense of the tax payers’ money.
Lets look at the details of the tax collection and expenditure for better reflection of this economic scenario.
First, there is a 37% rise of the number of salaried taxpayers between FY 2013/14 and 2016/17 from 1.70 crore to 2.33 crore (Assessment Year 2017-18) and 19% for non-salaried individuals from 1.95 crore to 2.33 crore. Also, the average income declared by the salaried taxpayers went up by 19 per cent from ₹5.76 lakh to ₹6.84 lakh.
During the same period, there has also been a growth of 19 per cent in the number of non-salaried individual taxpayers from 1.95 crore to 2.33 crore and the average non-salary income declared has increased by 27 per cent from ₹4.11 lakh in Assessment Year 2014-15 to ₹5.23 lakh in Assessment Year 2017-18.
Together, income tax is filed by 4.66 Cr of population that is 3.5% of the population and roughly 5% of the adult population or 9% of working population. In other words, this 3.5% of the population actually paid income tax in 2016-17 and contributed 16% of government revenue. With 80% above poverty line, this means that more than 100 Cr population above poverty line are not covered under tax bucket.
Secondly, the other major component of direct tax (19% of government revenue in FY2016-17) is contributed by the corporate taxpayers. The average tax paid by this category of assesses has increased from ₹32.28 lakh in Assessment Year 2014-15 to ₹49.95 lakh in Assessment Year 2017-18, a growth of 55 per cent. This is significantly higher than growth of the corporate sector during this period. This is possible owning to combination of factors, eg. better performance of the existing tax paying businesses, digitization of tax assessment, improved government machinery and regulation for tax collection etc. We thus see an increase of 26 per cent in the average tax paid by individual taxpayers from ₹46,377 in Assessment Year 2014-15 to ₹58,576 in Assessment Year 2017-18.
Thirdly, for an average tax paying salaried individual, the tax burden would be 10% - 30% plus cess etc. Assuming that about 35% of income paid in income taxes and 15% of income as saving, the remaining income will be used for individual expenses. These expenses of individual income are mostly covered under GST with an average of 18%. So for a salaried individual with 30% tax bucket, additional tax in the form of indirect tax is 8-9% and total tax liability of 45% of overall income. Even the poorest of the poor end up paying 12-18% of income in the form of indirect tax (as almost 100% of their income are spent with hardly any saving).
Fourthly, if we intuitively map the revenue to expenditure, it shows some interesting results.
The government borrowing (19%) in the revenue side matches interest payment (18%) in expenditure. In other words, the government borrows to pay the interest (on previous outstanding loan) and the money is not spent for development. Similarly, non-tax revenue (10%) and custom duties (9%) match subsidies (10%) and defence expenditure (9%). About 35% of the income and corporate tax are shared with the states and on centrally sponsored schemes. In other words, 35% of contribution for development is sponsored by 3.5% of the population and a select group of corporates. However, this is not adequately acknowledged, appreciated and/or recognised by the government.
The new effort to plan for recognising the tax paying population should be seen as a positive development. This is not a unique proposition though and is in practice in multiple countries in different shape or form.
In Japan, model taxpayers can get a photograph taken with the emperor. In the Philippines, they can have their name on a lottery for compliance under the value added tax regime. In South Korea, honest taxpayers receive certificates and have access to airport VIP rooms and free parking. Pakistan has a scheme to reward the top 100 taxpayers every year with access to VIP lounges at airports, fast-track clearance at immigration counters.
Malta runs a monthly lottery on physical/ electronic VAT receipts and offers multiple prizes (including the lucky winner bagging a cash prize amounting to 100 times the tax paid) till fund is available. Such VAT lottery schemes, also run in Taiwan, Slovakia and Portugal. Greece has a €1000 tax jackpot for small businesses.
In earlier years, India had a programme called Samman that was stopped in mid-nineties. The recent initiative of the government sharing a appreciation certificate with tax payers is a welcome first step. It is also great to hear the Finance Minister referring to tax payers’ contribution in his FY20 interim Budget speech.
We should consider some innovative ideas going forward, namely ~2% discount on car registration charges, discount for local taxes in the state of domicile, passports on priority, fast track for immigration at major India airports, priority check-in at the airport etc. The incentives can be extended for top consistent exemplary tax payers, e.g. free toll pass in domicile State or across India, airport lounge access, a cup of tea with the state governor.
It’s not a question about how the Government recognises this Group that contributes for the development of the country. Recognition of the contribution by the Government and in a broader scale, transparency and effective spending of the tax paid are the aspirations of the tax payers. Are we asking too much!!
(The view expressed by the author is personal)