A tweet from a government handle, now deleted, was the cause of much upset with social media going a little nuts on the increasing compliance burden on the Indian taxpayer and the increasing intrusion of big government into citizens’ lives. The tweet lists 11 categories of financial transactions that, if made, will trigger reporting by the receiver of the money to the income tax department. Already banks and mutual funds report transactions above a certain threshold. The scope of this reporting is set to expand.
The shops, banks, mutual funds, hotels and so on will make the disclosure to the tax department, and not the taxpayer. The government hopes to find a discrepancy between the income disclosed during the tax filing process and the spends made. As we file our tax returns for financial year 2019-20 (last year), we will see a box that only some people need to tick. These are people who claim that their gross taxable income (before applying any deductions) is ₹2.5 lakh or less, but have made transactions of ₹1 crore or more in a current account, have paid ₹1 lakh or more in electricity bills and have spent ₹2 lakh or more on foreign travel. We see these people around us, they are the ones pulling out wads of cash to pay for high-value gadgets, jewellery, hotel bills and more. They are the ones paying 50-70% of property purchases in cash.
It is the unwillingness of the Indian citizen to pay tax that has made government after government try to bring them in the tax net. India’s direct tax (personal and corporate) to GDP ratio at just under 6% is lower than that of other countries with similar GDP. But look beyond these numbers and you see that the personal income tax to GDP ratio of India is lower still (see graph). We are at the lower end of the spectrum on per capita income as well. There is a link between more citizens paying personal income taxes and the ability of the government to spend on education, health, infrastructure, social security and other needs of a welfare state. But out of 1.3 billion, just 15 million pay taxes. Less than 7% paid taxes of ₹1.5 lakh, almost 53% paid less than ₹1.5 lakh in taxes and a huge 40% paid no taxes at all.
India needs more people to pay taxes because the capacity to pay is there—we see it anecdotally in spends and in data on consumption and investment. Governments have tried various schemes, including amnesty, but the unwillingness to pay tax is like a badge of honour for Indians who openly mock at those who do have to pay. Short of resorting to a regressive consumption tax (on spends of citizens), the government is trying to use big data, disclosures and the mapping of PAN to Aadhaar to figure out the list of evaders.
Will it increase compliance? Not for people who are paying taxes already, but hopefully for those who do not. If you connect the dots, you’ll see the introduction of faceless scrutiny, where the ability of an extractive tax department to hound honest taxpayers is greatly reduced, comes along with the use of big data to suss out those who evade taxes. Will it work? How you think about this depends on which side of the tax threshold you sit. For me demonetization was a big revelation of how almost everybody seemed to have non-tax-paid income. Even people who otherwise are intellectually and morally very upright and have very high standards for others. Their justification of taking payments in cash was: why will we give the government our money, it does not know how to spend. This column is not about a rebuttal to this straw man argument, but it was stunning coming from the erudite mouths.
Unless more Indians pay direct income tax, India will continue to operate at the low end of the spectrum with very limited state financial capacity. The use of technology to both attempt to reduce the harassment by the tax department and to catch the unwilling Indian taxpayer is very welcome. The next few months will tell us how wily both the non-taxpayer and the tax department can be. This is still work in progress.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation