With the DeMo boost gone, reality check for tax regime PDF Print E-mail
Friday, 10 May 2019 04:06
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With a likely shortfall of over Rs 1 lakh cr in FY19 taxes, the tax-GDP ratio will be 11.2 vs 10 in FY14 & 11.2 in FY17; FY20 targets are tough


After analysts at Kotak Institutional Equities put out a note on the minor contraction in the number of e-returns being filed for personal income taxes in FY19—after averaging a growth of more than 25% in each of the preceding three years—the income tax department put out a press release saying that, in reality, personal income tax e-returns had risen 19%. It arrived at this number by arguing that the tax returns that mattered were really those filed for the current year, and those had risen sharply. So, of the 6.74 e-returns in FY18, the taxman said, just 5.47 crore pertained to FY17 (these are, by law, filed in FY18) and 1.21 crore were for FY16. Of the 6.68 crore e-returns filed for income tax in FY19, 6.49 crore were for FY18; hence the 19% growth claim.

While the analysis is correct, with such a detailed break up of each year’s e-returns not publicly available, it is not clear whether the previous high growth rates of earlier years – each one celebrated in an income tax department press release – were based on the correct comparison either. To get caught up in this, however, is missing the wood for the trees. What is more important is the level of tax collections and whether they are growing as fast as the growth in the number of e-filers, for instance. The picture here is mixed. Total tax collections were 8.9% of GDP in FY04, the year before the UPA first came to power, and while these rose to 11% of GDP in FY09—thanks to higher GDP growth—they fell to 10% in FY14, the year before the NDA came to power. This rose dramatically to 11.2% in FY17, the demonetisation year, clear proof of how the policy had boosted compliance. The problem, however, is that the tax-to-GDP ratio for FY19 is likely to be flat at 11.2%, suggesting that the demonetisation bump is over. Indeed, 11.2% of GDP represents a fairly significant shortfall in projections since the budget had projected FY19 collections at 11.9% of GDP; while the government itself admitted to a Rs 1 lakh crore shortfall in FY19’s central GST collections when the FY20 budget was presented in February, there has been, in addition, a further shortfall of about Rs 1.1 lakh crore in personal income tax collections as well as GST.

In which case, if total tax collections for FY19 are Rs 21.4 lakh crore, this means a tax-to-GDP of 6% in the case of direct taxes and 5.2% in the case of indirect taxes; the tax-to-GDP ratio for direct taxes was last at 6% in FY08, a year in which nominal GDP grew 15.1% as compared to 10.2% in FY19. The fact that tax-to-GDP levels are comparable despite lower GDP growth today suggests greater tax compliance and, to that extent, is welcome, but compliance levels are still quite low. Also, with FY20 tax collections targeted at Rs 25.5 lakh crore, this means tax revenues will have to rise 19%, which is a tax buoyancy of 1.7, a growth last seen in FY08. With just 81,344 individuals declaring their FY17 incomes as more than Rs 1 crore, for instance, it is clear there is huge evasion here since, according to PRICE’s all-India survey, around 6.6 lakh individuals have such an income in the country. If India is to achieve the kind of tax growth required in FY20, this means the taxman will have to get more taxes from those who managed to dodge demonetisation by simply depositing their cash in the bank and pretending this was their income for FY17; the tax notices sent to them need to be converted into actual demand notices and, then, payment of taxes. Also, invoice matching needs to be implemented in GST to not only stop evasion here, but once this happens, even direct tax collections – both personal income and corporate income—will rise much faster. Also, with the tax department’s Project Insight—a linking of various databases of taxes, credit card payments, jewelery purchases, etc—now up and running, this should help catch chronic evaders.





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