Demonetisation and implementation of Goods and Services Tax (GST) have resulted in “a substantial increase” in the number of new taxpayers in the country, Economic Survey for 2017-18 said. While the taxpayers under the new GST regime have increased by 50 per cent or 3.4 million, there has been an addition of about 18 lakh individual income tax filers since November 2016, the month of demonetisation announcement.
The Survey has also combined numbers from EPFO and ESIC with GST data to show that India’s formal sector, especially formal, non-farm payroll, is greater than what is currently believed. The Survey stated that formality defined in terms of social security provisions like EPFO/ESIC has shown the formal sector payroll to be about 31 percent of the non-agricultural workforce, while on being defined in terms of being part of the GST net, the formal sector payroll share has been found to be 53 per cent. It added that out of the total estimated 71 million non-agriculture enterprises, around 13 percent are registered in GST.
From a social security perspective, formal non-farm payroll is estimated at about 7.5 crores, or 31 per cent of the non-agricultural workforce. This estimate includes government non-farm payroll (center and states), which is roughly estimated at 1.5 crore (excluding defence personnel), the Survey said. From a tax definition, the formal non-farm payroll is estimated at 12.7 million, implying that nearly 53 percent of the non-agricultural workforce (240 million) is in the formal sector.
Only about 0.6 percent of firms, which account for 38 per cent of total turnover, 87 per cent of exports, and 63 per cent of GST liability are in the “hard core” formal sector in the sense of being both in the tax and social security net. 87 percent of firms, representing 21 per cent of total turnover, are purely informal, outside both the tax and social security nets, the Survey stated.
Around 12 percent of firms, accounting for 41 percent of turnover, 13 percent of exports, and 37 percent of tax liabilities are in the tax net but not the social security net. Less than 0.1 percent of firms accounting for about 14 percent of turnover are in the social security net but not in the GST net, consisting of mostly firms that are in GST-exempt sectors such as education, health, electricity, the Survey said.
For the rise in individual income taxpayers since demonetisation, the Survey said the average income of new filers was close to the income tax threshold of Rs 2.5 lakh, limiting the early revenue impact, but “the revenue dividends should increase robustly”, as income growth over time pushes many of the new tax filers over the threshold.
Detailing the number of registrants under GST, the Survey said that bulk of transactions are business-to-business (B2B) and exports, accounting for 30-34 per cent of the total turnover, while business-to-consumer (B2C) transactions account for only 17 percent of the total turnover. The Survey, authored by a team led by Chief Economic Adviser Arvind Subramanian, also said that the new registrants under GST regime have shown voluntary compliance. More than 54.3 per cent of those eligible to register under the composition scheme have chosen instead to be regular filers under GST, it said.
States of Maharashtra, Uttar Pradesh, Tamil Nadu and Gujarat have seen the highest number of GST registrants, with Uttar Pradesh and West Bengal having recorded “large increases in the number of tax registrants compared to the old tax regime”, the Survey said. It also said that the data suggests fairness and balance in GST outcomes as the topmost states in GST revenues are perfectly correlated with their share in overall Gross State Domestic Product (GSDP), allaying the pre-GST fears of major producing states that the switch to a destination and consumption-based tax would transfer the tax base toward consuming states. Under the GST regime, Maharashtra accounts for 16 per cent of the GST base, followed by Tamil Nadu with 10 per cent, Karnataka at 9 per cent, Uttar Pradesh at 7 per cent and Gujarat at 6 per cent.
The survey, however, highlighted that low level of tax collections by the local governments in rural areas are posing a challenge in reconciling fiscal federalism and accountability, adding that the direct tax collections by Indian states and other local governments such as property tax, land revenue are significantly lower than their counterparts in other federal countries. Panchayats received 95 per cent of their revenues from the devolved funds from the Centre/State while generating only 5 per cent from own resources, it said.
Though direct taxes account for about 70 per cent of total taxes in Europe, in India the figure is around 35 per cent. “Unlike in other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the GST proves to be a buoyant source of revenue,” the Survey said. The Survey said that in India the states generate very low share of about 6 per cent of their revenue from direct taxes while the figure is 19 per cent in Brazil and 44 per cent in Germany. In the third tier, rural local governments in India generate only 6 per cent of revenues from own resources compared to 40 per cent in Brazil and Germany. Meanwhile, urban local governments in India are much closer to international norms, collecting 18 per cent of total revenues from direct taxes compared to 19 per cent in Brazil and 26 per cent in Germany. Further, urban local governments in India generate 44 per cent of their total revenue from own sources.