THE GIST of Editorial for UPSC Exams : 30 October 2018 (Who pays taxes and who doesn’t )

Who pays taxes and who doesn’t

Mains Paper: 3 | Economy
Prelims level: Tax returns
Mains level: Financial inclusion in economy through taxation


  •  The Central Board of Direct Taxes has released the latest data on income tax collections.

  •  Several interesting facts emerge from the data.

  •  The number of taxpayers has increased drastically over the last four years.

  •  The number of tax returns filed has surged to 6.85 crore in FY 2017-18, an 80% growth since FY 2013-14.

  •  Also, the number of taxpayers reporting income greater than ₹1 crore has reached 1,40,139, an increase of 60% between assessment year (AY) 2014-15 and 2017-18.

Under-reporting still a concern

  •  With low tax slabs, the average reported income has also increased, this is not the case with high income groups.

  •  After 2016, the average income reported by those in the highest tax slab is 13% less than their average just before 2016.

  •  Apparently, a number of high-income individuals (HIIs) grossly under-report their income.

  •  The Income Declaration Scheme of 2016 and other official measures announced to stem tax evasion by the rich have failed to achieve the desired results.

What are loopholes?

  •  Tax avoidance/ evasion by companies also remains an area of serious concern.

  •  In AY 2017-18, a mere 7% of corporates reported profit before tax of more than ₹1 crore.

  •  Again, the problem of under-reporting is serious with professional and the other service sector entities, which account for more than one-third of all corporates.

  •  The share of direct taxes in the total tax collection has remained low.

How it can be improved?

  •  The tax collection figures for this year look better.

  •  Some of the apparent improvements will be due to cooking of the books by companies, facilitated by schemes like the Presumptive Taxation Scheme.

  •  This allows an assessee to take full benefit of past evasion and escape without scrutiny, simply by paying a turnover tax.

  •  To increasing the threshold from ₹1 crore to ₹2 crore, the government has made the scheme even more attractive.

  •  The number of filers under the scheme shot up to 1.17 crore on August 31, 2018, from 14.93 lakh on August 31, 2017 — a stupendous growth of 681%!

Reforms in tax law needed

  •  The extant tax law does not require filing of returns if the income is below the taxable threshold (₹2.5 lakh).

  •  This means that many professionals who can easily manipulate their accounts never appear on the radar of the taxman.

  •  The law should mandate filing of returns by all professionals and proprietorship businesses regardless of their profit.

  •  This will increase compliance by enabling the taxman to scrutinise suspicious cases. There is also a case for the wealth tax.

  •  Compared to income, the wealth level is harder to manipulate; therefore, the tax is harder to evade.

  •  For companies, the tax law allows offsetting of past losses against future profits.

  •  These provisions are widely misused by corporates by claiming bogus expenses, to artificially reduce their profit and hence their tax liability.

  •  In, AY 2017-18, as much as 46% of corporates reported either losses or nil profit.

  •  Another 47% reported profit less than ₹1 crore. These provisions need re-examining.

  •  A large number of companies showing negligible or no profit points to a continued prevalence of shell companies and other dubious structures which require systematic investigation.

  •  Moreover, the numerous tax exemptions also come in handy for tax avoidance.

  •  Big corporates benefit more from these exemptions. Consequently, smaller companies face a higher effective tax rate compared to larger corporates.

  •  This makes the tax regime regressive.

  •  The Budget papers 2018, the effective tax rate of companies with profit greater than ₹500 crore was only 23.94%, while it was higher at 29.43% for companies with profits less than 1 crore.

Way forward

  •  There is also a need to enhance the deterrence power of the law, which depends on the likelihood of punishing tax evaders along with imposing a fine.

  •  At present, the Income Tax Department has a very poor win rate before the appellate tribunal and the higher judiciary.

  •  As a result, the law does not bite enough to hurt the tax offender.

  •  The odds of punishing the offenders can be increased by integrating the GST.

  •  The income tax and the Ministry of Corporate Affairs’ databases.

  •  These measures will go a long way in deepening the tax base among high-income groups and professionals.

  • The number of tax returns filed has gone up but collections have not shown a commensurate increase


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