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FE Editorial : The taxman cometh

Though finance minister P Chidambaram has been exhorting the taxman to get corporates to increase their tax compliance?each increase of 1 percentage point in the effective tax rate from the current 24.1% towards the nominal rate of 32.5% yields around Rs 15,000 crore?he has done well to turn the focus on the real evaders: high…

Though finance minister P Chidambaram has been exhorting the taxman to get corporates to increase their tax compliance?each increase of 1 percentage point in the effective tax rate from the current 24.1% towards the nominal rate of 32.5% yields around Rs 15,000 crore?he has done well to turn the focus on the real evaders: high net worth individuals. To add punch to the stern warning issued to tax evaders by the revenue secretary, the taxman finally seems to be making some use of the massive amount of data he has been collecting over the years from credit card companies, jewellery shops, car dealerships, land record offices, and so on. While only 1.5 million of India?s 40 million taxpayers claim to have an annual income of over R1 million, the taxman?s data show that 1.6 million persons paid over R2 lakh in credit card bills in FY12, 1.2 million people bought or sold properties worth more than R30 lakh, 5.2 million bought mutual funds of more than R2 lakh or bonds of more than R5 lakh and around 3.4 million made cash deposits of more than R10 lakh in their bank accounts. In other words, a substantial proportion of persons having incomes of over R1 million are not declaring this to the taxman. Which is why, despite the way incomes have grown, personal income tax collections stubbornly remain at around 18% of total tax collections, a number that has remained unchanged for the last decade. The much-maligned corporate tax collections, on the other hand, have risen from around 21% of total tax collections a decade ago to around 35% in the latest budget estimates.

While there is no precise number, income demographics expert Rajesh Shukla, who has been conducting such surveys for years, reckons around 5-6 million Indian households have an annual income of over R1 million. Even if you take the number of such households as 5 million and conservatively assume that they have an average income of R10 lakh and a tax payable of a fourth that, this means extra personal tax collections can easily rise by another R1,25,000 crore. Since some part of these people will be rich farmers who are exempt from paying taxes, it?s a good idea to discount the figure, but no matter what you do, an increase of 50-60% in personal income tax collections looks achievable.

The other issue worth keeping in mind, as analysis done for the finance ministry by FE columnist Surjit Bhalla has shown, there is a very large share of the middle-income group that evades taxes by showing lower incomes (Bhalla calls this the missing middle). While it is true tax compliance has risen with lowering tax rates in the past, the ministry has done well to let tax evaders know it is keeping tabs on them. Using that data to zero in on evaders is the next step.

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First published on: 12-12-2012 at 01:26 IST
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