Widening the tax base requires a more efficient taxman
Joe C Mathew December 2, 2015
Rajinder Kumar (name changed), an income tax officer, was back in his Delhi office by 7 am on September 29, 2015, barely six hours after he had left for home the previous day. He had less than 48 hours to complete a task - to serve notices to hundreds of taxpayers whose names were fished out by the Centralised Processing Center (CPC) of the Income Tax department in Bangalore.
The CPC had carried out an automatic scrutiny of 37 million taxpayers for the assessment year 2014/15 and had pulled out the records of 2 per cent, or 0.7 million, for scrutiny. The task was distributed among 18 regions of the Central Board of Direct Taxes (CBDT) across the country.
Kumar's team members, who were physically handing over notices as was required by the law, were racing against time. The second tranche of names, addresses and phone numbers had reached them in mid-September, at a time when they were still to take action on the first list that had arrived in August. Besides, 20-30 per cent of the addresses were of PAN holders who were outside their jurisdiction. To add to their woes, a Delhi High Court order of March 5 had demarcated the jurisdiction of I-T officers, and had observed that notices that were not served within six months of the assessment period (on or before September 30) had no value.
When Business Today caught up with Kumar, he had a list of 400-plus notices, out of which 100 were beyond his jurisdiction. He not only had to collaborate with his counterparts in other regions of the country, but also had to deal with invalid addresses or phone numbers.
Like Kumar, over 20,000 officers and support staff across India, had hit the road during August and September to serve the I-T notices on time. In 2013/14, their efforts had paid rich dividends with CBDT collecting Rs 72,528 crore through tax demands, a majority of which came from scrutiny of such income tax returns.This exercise has, however, slowed down the progress of a much bigger initiative by Finance Minister Arun Jaitley - to expand India's taxpayer base - because the same set of officers was expected to focus its energies on it. "We have neither the motivation nor the manpower to take up additional responsibilities like widening of the tax base," says Ajay Goyal, President, Income Tax Gazetted Officers' Association (ITGOA), the only recognised employees' union for the mid-level officers of CBDT. ITGOA and the Income Tax Employees Federation of the non-gazetted employees, which claim to represent 97 per cent of the total workforce in the department, have been agitating over delays in promotions, better infrastructure and manpower to handle the ever-increasing responsibilities. They called off their protest on November 3 after the government assured them of addressing their concerns by March 31, 2016. Incidentally, Prime Minister Narendra Modi has also talked about the need for a performance-linked appraisal system for income tax officials.
Widening Tax Base
On July 17, CBDT had set region-wise targets for its officers to bring in new taxpayers into the system and, in the process, widen the taxpayer base. The Pune circle was asked to add one million (10,14,418) new taxpayers during 2015/16 - the highest target in the country. India's total target stood at 10 million. While there are no official estimates of the additional revenue that this could translate into, officials say that the department's annual target was Rs 25,000 crore over and above the budgetary target, from additional and more effective scrutiny of I-T returns since the past two years.
The government's income tax collection target for 2015/16 is Rs 7.98 lakh crore. It has projected a gross tax revenue (direct and indirect tax) of Rs 14.5 lakh crore. Direct tax, which includes corporate tax and individual income tax, accounts for approximately 55 per cent of the government's tax revenues. The rest comes from indirect taxes - customs and excise duties, service tax, etc.
CBDT Chairperson, Anita Kapur, who does not share the associations' apprehensions, is confident of achieving this target by the financial year-end. "Widening tax base is a continuous process. It is doable. We are hoping to achieve the one crore (new assessee) target," she says.
Expansion of the tax base and the taxpayer base have been discussed by governments, parliamentary and finance ministry panels and expert committees, such as the Tax Administration Reform Commission (TARC), for several years now. The government covered some ground in expanding the service tax base by introducing a negative list of exempted services. Transfer pricing, minimum alternative tax, and plans to unearth black money are all various manifestations of the central government's desire to widen the tax base. The introduction of Goods and Services Tax (GST) is also expected to widen the tax base, lower tax rates, increase the compliance level and generate more revenues. However, much remains to be done in widening the direct tax base.
TARC Chairman Parthasarathi Shome convincingly argues for an expanded tax base in the committee's third report submitted in November 2014. "In the last 10 years, direct tax collection has increased by more than 700 per cent (from Rs 69,198 crore in 2001/02 to Rs 5,58,965 crore in 2012/13), but the number of taxpayers has grown by only about 35 per cent," the report states. It says the total number of taxpayers in the lowest income slab, i.e., income of up to Rs 5 lakh per annum, comprises 98.3 per cent of total taxpayers and accounts for 10.1 per cent of tax revenues. The figures point to the narrowness of the income tax base in revenue terms and its adverse impact on tax buoyancy.
The government's top ranking advisors - Arvind Subramanian, Chief Economic Advisor, Ministry of Finance, and Arvind Panagariya, Vice Chairman, NITI Aayog - are, however, both in agreement when it comes to the easiest solution to expand tax base: Implementation of GST. Once the glitches and teething troubles of GST are over, they feel that the tax reform will widen the tax base and generate additional annual revenues of about 1.5 per cent of gross domestic product (GDP).
In March 2013, the then Finance Minister had proposed a 10 per cent surcharge that would be applied to people with an annual income of at least Rs 1 crore. The assessment was that it will apply to only 43,000 individuals in India. The Shome panel argues that the number of crorepatis would have been at least three times the estimates back then.
As compared to 39 per cent in Singapore, 46 per cent in the US and 75 per cent in New Zealand, only 3.3 per cent of India pays tax. It is true that a vast majority of Indians are poor, but the TARC report estimates that at least 7 per cent of the population should come under the tax net, as only a fraction - 37 million - of the 220 million permanent account number (PAN - the 10 digit alphanumeric code that uniquely identifies a taxpayer) holders currently file tax returns.
Stating that tax defaulters owing tax above Rs 10 crore are regularly monitored, Minister of State for Finance Jayant Sinha said that in cases where the taxpayer is not traceable or have no assets, or inadequate assets, the names of such tax defaulters are placed in the public domain as per the prescribed guidelines. "The income tax department published a list of 18 defaulters in March and 31 in April 2015," Sinha said.
Out of the 7.2 lakh operational firms registered with the Registrar of Companies (ROC) in 2011, only 3.76 lakh were corporate tax payers. In 2012, the numbers were up by 8.01 lakh and 5.85 lakh, respectively. All were legally required to file returns.
The problem of non-filing is universal. In fact, only 33 per cent of registered persons under the service tax net filed returns in 2012/13, at a time when many services became taxable following the shift to the "negative list". Similarly, more than 50 per cent registered central excise taxpayers are known to be tax defaulters.
The missing taxpayers begin with a few thousand high net worth individuals to several lakhs of unregistered merchants, family-owned businesses and professionals who predominantly transact in cash. Rich farmers are the other segment. "There are flourishing informal market ecosystems - paying-guest accommodations, dhabas, kirana stores, stationery shops, etc. -around every major institution, be it university, hospital or industry. Majority of them do not pay taxes. We need to get them into the system," says a former CBDT chairman, who did not wish to be identified.
"Some 15-20 years ago, the income tax department had a practice of carrying out door-to-door surveys in market areas to identify such potential tax defaulters," he says, adding: "The surveys were not supervised, so they were not always fairly carried out. On the other hand, when it was fair, the officials faced hostile traders, even threats of physical assaults." The imperfection in the system, and the practical difficulties in implementing it, resulted in the CBDT abandoning the practice altogether. Instead, it uses less intrusive ways of approaching potential taxpayers today.
The Game Plan
The CBDT's decision to add 10 million new tax payers in 2015/16 could be too ambitious, but the numbers do keep getting added every year. For instance, the number of new assesses added in 2012/13 was 3.2 million. It was 1.9 million in 2011/12. According to the annual report of the finance ministry, in 2014/15, 0.86 million new assesses were added till October 30, 2014.The decision to target 10 million new tax payers this year was not taken on the basis of any random thought. The existing tax base in a particular region, the absolute numbers of new taxpayers added during the previous years and the number of people with potential tax liabilities were all taken into account while arriving at the region-specific targets.
In fact, the department has been implementing a Non-filer Monitoring System (NMS) since January 2013 to identify non-filers with potential tax liabilities. It collects data from various agencies on specific financial transactions in the form of annual information return (AIR). Collection of information on high-value transactions from third parties by its dedicated wing, Central Information Branch, or CIB, and monitoring tax collected at source (TCS) and tax deducted at source (TDS), also leads the IT department to potential tax defaulters.
For instance, banks are supposed to pass on information regarding fixed deposits exceeding Rs 2 lakh, credit card payments aggregating to Rs 1 lakh or more in a year and cash payments to purchase bank drafts or bankers' cheques of Rs 1 lakh or more, among others.
In 2015, the NMS identified around 4.4 million people who had not filed tax returns despite potential tax liabilities for assessment year 2013/14. Information relating to these non-filers was made available on the 'compliance module' on the e-filing portal of the IT department.
In a reply to a Lok Sabha query, Sinha had recently informed that 30,68,662 new returns have been filed and additional tax of Rs 4,733.61 crore has been collected from persons identified as non-filers by the income tax department through its NMS in 2013, 2014 and 2015. "During the years 2013, 2014 and 2015 (up to March 31, 2015), NMS has identified 12.9 lakh, 22.09 lakh and 44.09 lakh non-filers, respectively, having potential tax liabilities," Sinha said.
The department has also launched "Project Insight" to ensure optimal utilisation of the data available. This initiative addresses the challenges faced in widening the tax base, including issues such as old addresses, non-responsive filers and inadequate resources for follow-up. The department wants it to leverage data analytics, alert management and case analytics capabilities to prepare comprehensive case profiles and select appropriate intervention. The department claims that the Compliance Management Centralized Processing Centre (CMCPC) being set up under the project will further enhance its capability in widening the tax base.
Jose K., a high net-worth farmer from Kottayam district of Kerala, says he is willing to pay taxes if it adds to his prestige. "What is the advantage of paying taxes today, other than scrutiny and doubtful queries from income tax officials? Let the government say that they will recognise tax payers by honouring them in some way or the other. There will be many who will come forward to pay taxes," he says. Kuldip Kumar, Partner and Leader Personal Tax, PricewaterhouseCoopers, says suggestions like that of Jose are not completely off-track.
"The time has come to think over how to recognise and reward the honest tax payers. A few benefits, such as priority in getting or renewing passports, driving licences or extra facilities at airports, should be offered to those paying taxes beyond a certain limit. Some other benefits like getting additional points during admission of their children to schools and colleges, or other government institutes or engineering colleges, etc., will also work well in creating an environment for increasing the compliance behaviour," says Kumar.
Hemant Jain, a Delhi-based chartered accountant, says low taxation rates can in itself increase the compliance level to a large extent. "If your tax rate is 10 per cent today, make it 5 per cent, and you will see the difference," he adds. However, income tax department officials say that one can have all the systems in the world, but cannot widen the tax base without adequate human resources to act on information.
According to the finance ministry, CBDT has 42,069 officers and staff compared to the sanctioned strength of 75,092. Employees' unions say majority of these vacant positions are at the middle and lower levels - people who are responsible for handling all the big assesses, and collecting more than 80 per cent of the revenue. "There are more than 30 per cent vacancies among cadres who directly take part in the collection of revenue and provide tax-payers services," says Bhaskar Bhattacharya, Secretary General, ITGOA. A CBDT spokesperson said that appointments need to follow due processes and, therefore, it takes a lot of time.
The Road Ahead
While it may not be immediately possible to strengthen the income tax department's workforce, several steps can be taken to ease the workload on the existing staff so that they can pursue the objective of widening the tax base. For instance, the scrutiny of income tax returns, which is a routine matter, could have happened earlier. The computer-generated data could have been made available in April. "Why did they wait till August and September when the data was in the system since April? Why can't they amend the rules to allow automatic mailers to replace physical handover of notices?" asks Goyal, adding: "There have to be better systems to handle data."In fact, the Shome panel had expressed similar views when it had said that the Tax Policy and Legislation (TPL) Unit and the Tax Research Unit (TRU) of both direct and indirect tax departments have not begun to analyse the computer-generated data for meaningful results. Moily's parliamentary panel had wanted the recommendations of the TARC to be considered and implemented. Revenue secretary Hasmukh Adhia says that many of the TARC suggestions have already been implemented and the department will compile and put them in the public domain soon.
The government must have begun the efforts to simplify tax administration and broaden its base, but for 2015/16, at least, the buoyancy in tax collection is primarily due to the increase in indirect tax collections, and not because of a widened tax base. That's certain.