India’s income tax department released time series data for the period 2000-01 to 2014-15 last week in an attempt to enhance transparency and encourage analysis which could provide insights for policymakers. That’s a good beginning. Some worrying trends in tax collection have been highlighted. And the fact that, in one of the fastest growing countries of the world that is being targeted by most top global wealth management firms, there are just 18,359 individuals who have reported earnings in excess of Rs 1 crore in 2011-12 and paid tax on it. Indeed, by putting in the public domain an annual statement on tax foregone, the government was able to influence public opinion on corporate tax breaks. Similarly, the data on individual tax assessees could help in sensitising many on the need for the affluent to contribute more at a time of growing disparities.
It is disconcerting that of the over five crore individuals who filed their tax returns, 80 per cent of all personal income tax was accounted for by the top 11 per cent, with 1.6 crore tax filers paying no tax — being in the lowest tax bracket. The data also shows that 85 per cent of taxpayers pay less than Rs 1.5 lakh annually — a pointer to the challenges in widening the tax net and raising collections. At first glance, the data on the top earners or the creamy layer — or rather their shockingly low numbers — may further endorse the growing belief of rising income inequality. But if the number of crorepatis appears low, perhaps it may have to do with the fact that a huge chunk of income in the form of long-term capital gains — at Rs 70,121 crore in FY 2012-13, for instance — is exempt from tax. Coupled with that is the set-off of loss in business income (at Rs 67,963 crore) and, to a lesser extent, farm income, which is also not taxed. All this has meant that India’s gross tax to GDP ratio — a key indicator of tax buoyancy but also a wider base — has remained stagnant at close to 10 per cent during the last few years.
For a country like India, which needs to spend on health, education and social security and also build social and physical infrastructure, it is critical to address the challenges on the tax policy front swiftly. These include both the widening and deepening of the tax base, whittling down of exemptions and improving compliance, especially by leveraging technology. The release of data offers an opportunity to policymakers to engage in a wider public debate on the current tax policy, including on the capital gains tax — on which the government has kicked off a corrective step in this year’s budget.