An improving
paradigm
Based on an
analysis of financial year 2013-14 statistics from the income tax department we
had argued, in a paper titled Taxing
Times published in February 2017, that India’s tax base was alarmingly low.
The gross total income reported by all those who filed tax returns was Rs 27
trillion, a paltry 23.7% of India’s GDP that year[1]. Basically, three quarters of national income was out
of the direct tax net which, even if one excludes farmers and the poor, seemed
unreasonable. Further, the tax buoyancy factor – the ratio of growth in tax collections
to growth in GDP – had slipped to below 1. This should be considered
unacceptable as a developing country should logically be expanding its tax base
year on year and collections should grow faster than GDP. This is because tax
revenue includes the effects of both existing taxpayers earning higher incomes
as well as new taxpayers being added to the base. Recently, statistics for the
following year, FY15, were published and they provide evidence that matters are
improving.
The tax base is
expanding
The gross total
income reported by all assessees who filed complete and correct returns in FY15
grew by 25% to Rs 33.6 trillion. That still amounts to only 27% of GDP but is an
encouraging increase of 3 percentage points in a single year. The number of
returns themselves increased from 39.1 million to 43.6 million, a growth of
11%. This means that the rise in the taxed component of GDP is partly on
account of existing assessees declaring higher incomes. However, at 43.6
million, the number of tax filers remained abysmally low. The more commonly
cited figure of ‘effective assessees’, which includes those who have paid some tax
but did not file returns, is modestly higher at 61.3 million. However, it would
be fair to say that even this under-represents the country’s potential tax base.
As a crude benchmark, India’s private vehicle population (i.e. excluding goods
vehicles) in 2015 stood at 200 million. It would seem curious that less than a
third of such vehicle owners paid taxes when the cost of even a basic two
wheeler is high enough to warrant an income close to the taxable threshold.
One may draw some encouragement
from the fact that these figures pre-date demonetisation and GST and that
subsequent years would rack up better scores. Although detailed figures are not
available, Finance Minister Arun Jaitley did mention in his recent Budget
speech, that the effective taxpayer base jumped to 82.7 million at the end of FY17,
the year in which demonetisation was implemented. On the count of tax buoyancy
too, there is an improvement. The buoyancy factor increased to 1.22 in FY17 against
0.80 and 0.86 in the previous two years. It stood, in fact, at a 9-year high.
The revenue
service can do better
Taxpayers often
complain about aggressive collection drives by officials manifested in the form
of unreasonable and inflated demands intended to meet targets. It is believed
that many of these claims lack substance and are ultimately defeated in court
and data from the Economic Survey 2017-18 suggests that this is perhaps a valid
concern.
Direct tax
|
Indirect tax
|
|||
Forum of
appeal
|
Success Rate
|
Petition Rate
|
Success Rate
|
Petition Rate
|
Supreme Court
|
27%
|
87%
|
11%
|
63%
|
High Courts
|
13%
|
83%
|
46%
|
39%
|
ITAT/CESTAT
|
27%#
|
88%#
|
12%
|
20%
|
Success rate: cases with totally or
partially favourable ruling as a percentage of all cases. Excludes cases set
aside by the authority.
Petition rate: appeals filed by the department
as a percentage of all appeals.
# Provisional estimates.
ITAT: Income Tax Appelate Tribunal.
CESTAT: Customs, Excise and Service Tax Appelate Tribunal.
Source: Economic Survey 2017-18, Volume I,
Chapter 9. Data as of March 2017.
|
||||
As of March 2017,
there were 137,176 direct tax appeals worth Rs 5 trillion under consideration
of tribunals or the judiciary, while in the case of indirect taxes there were
145,000 pending appeals valued at Rs 2.6 trillion. In total, cases worth Rs 7.6
trillion, an astounding 4.7% of GDP, were stuck in litigation and the figure has
been growing over time. The more telling statistic is that the department’s success
rate at all three levels of appeal – appellate tribunals, High Courts and the Supreme
Court – averages less than 30%, in some cases as low as 11% (see table). This
is based on a generous definition of ‘success’, which includes rulings even partially
in the department’s favour.
Despite this, the
department continues to litigate aggressively. The Economic Survey notes that
83-88% of direct tax appeals as of March 2017 were initiated by the department
as against only 12-17% by the taxpayer. This would seem to be an inversion of a
basic tenet of having appeal forums in the first place – to provide redressal
to taxpayers. In the case of indirect taxes, the situation is better with the
Department’s petition rate at 20-63% across forums, and falling.
However, there is
one area the tax department has unequivocally improved upon – its disposal rate
of assessments. Against an average of 15-20 million annual assessments a few years
ago, the Department disposed of 25 million cases in FY16 and 33 million in FY17.
Its disposal rate has increased from 65% to 77% over the last two years pointing
to a concerted effort to improve efficiency. Delayed assessments create scope
for taxpayer harassment and an improvement in this regard is a welcome
development.
In the final
count, the picture that emerges is one where the tax base is steadily widening,
resulting in higher revenue buoyancy and, logically, lower levels of evasion.
Initiatives like demonetisation and GST have provided further momentum to this
trend. The revenue service has bettered its operational performance on some
counts but there is still substantial scope for improvement, which can contribute
towards the ultimate objective of sustainable revenue buoyancy.
[1] This is an
under-estimate as it only includes the incomes of 39.1 million taxpayers who
file returns. Another 12-15 million entities pay some tax but do not file
returns and their incomes are not included. Using their tax payments as a
surrogate, we estimate the extent of such income to be around 20-25% of the
reported figure.
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