That India’s taxmen are on hyper-alert is evident from the fact that, within a short while of the RBI report on the Cobrapost expose being submitted, they have written to banks asking for details of people who have been making large cash deposits without revealing their PAN details. Indeed, enthused by the response to the 1 lakh notices it sent out last year—it got 1.25 lakh extra returns in response to this—the tax department intends to send out 15 lakh letters in FY14 to those making high-value transactions but not submitting PAN cards. For FY12, the total value of such transactions captured by the taxman’s information base added up to R365 lakh crore—while this is many times higher than FY12 GDP of R89 lakh crore, the reason for that is the large number of multiple transactions like, for instance, the same money getting re-circulated as cash deposits in banks or purchases of mutual funds.
A few points, however, have to be kept in mind. For one, at 17% or so, India’s tax-to-GDP ratio is pretty much in keeping with that of countries with similar levels of development—as an economy grows and incomes rise, and a lot more of the economy gets into the formal sector, tax collections automatically rise. If there are 100 shopkeepers with an annual turnover of R10 lakh, to use an illustration, there will be no VAT collections since this is below the threshold level at which VAT is levied; but at a 10% VAT rate, R1 crore will get collected if there is just one shopkeeper with a turnover of R10 crore. Interestingly, while it is commonplace to say that just a fraction of India’s high-value transactions get reported to the taxman—that’s what the Cobrapost sting suggested—the taxman’s data is quite reassuring. Less than a fifth of all transactions captured are taking place without valid PAN details.
Whether or not those making the transactions are paying the correct amount of tax is something the taxman has to investigate, but it is clear that it is not just the rich who are avoiding paying of taxes. Analysis by the National Institute of Financial Management, one of the think-tanks tasked with estimating India’s black money, found that the effective tax rate was 22% for those in the 30% tax bracket, but just 6% for those in the 20% tax bracket—in other words, the well-heeled were more tax-compliant than the not so well off. So if compliance rates rose in this not-so-rich group, the taxman would get a lot more than by simply focussing on on the high-rollers. The most important point, far more important than trying to catch evaders through their spending habits, is to remove various tax exemptions—R5.7 lakh crore or 46% of total tax collections—and lower rates to see how compliance improves. The presence of exemptions also makes it difficult for the taxman to immediately figure out if those paying lower taxes are evading taxes or simply taking advantage of available concessions. The critical thing here is to have a complete computerised chain of transactions from the producer to the ultimate consumer—this is what the GST will achieve; the GST, the Prime Minister told Japanese businessmen, would only be in place after the elections.