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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

Context

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