Income Tax – Mere 1.5% Annual Growth in Taxpayer base

Growth in the number of taxpayers

Over the past few years, the CBDT in its Central Action Plan has been targeting a 15 per cent increase in new taxpayers vis-à-vis taxpayers added during the previous year. The taxpayer base increased from 319.03 lakh taxpayers in FY 2006-07 to 337.38 lakh taxpayers in FY2010-11, registering an increase of 5.8 per cent with an average annual rate of growth of 1.5 per cent. The total direct tax collections increased by 94.2 per cent during the same five-year period. Thus, the increase in tax collection was around 16 times as compared to the increase in the taxpayer base. This indicates a very limited widening of the tax base over these years while the pressure on existing taxpayers has increased manifold.

In FY2011-12, taxpayers in the income slab of up to Rs.5 lakh made up 98.38 per cent of total taxpayers, while those in the above Rs.20 lakh slab constituted only 1.30 per cent of total taxpayers. This suggests that the income tax base is narrow with a constrained revenue yield, which has adversely affected tax buoyancy. Even the target of adding 15 per cent to the number of taxpayers has not been achieved in FY20 10-11. Details of corporate and non-corporate taxpayers and new taxpayers added are provided in Table below-

Total direct tax taxpayer base

(In lakh)

 Source: 87th report of Public Accounts Committee, 2013-14

As shown in Table  below, 89 per cent taxpayers comprised of total taxpayers in the Rs.0-5 lakh income slab without commensurate tax yield. The Rs.10-20 lakh income slab has 4.3 per cent taxpayers. Tax collected in the Rs.0-10 lakh segment is Rs.3 6,986 crore and corresponding figure for Rs.10 lakh-Rs.20 lakh is Rs.17,858 crore. In the Rs.20 lakh and above segment, Rs.93,229 crore has been collected from only 1.2 per cent taxpayers. This shows that internationally our threshold is quite low but we collect a small amount on per capita basis from our lowest income tax slab. This keeps our taxpayer base as large as practically possible but does tend to transfer the tax pressure on upper slabs. Therefore, it is important to analyse (a) the extent to which taxpayers actually belong to higher slabs than they reveal in their tax returns, and (b) the extent of non-filers who should be brought into the tax net to expand the taxpayer base as quickly as possible. The taxpayer segments and their revenue yields suggest that the income tax base in terms of the proportion of contribution to revenue is rather narrow, which has adversely affected tax buoyancy.

No. of taxpayers in India and their slabs – FY 2011-12

 Source: Parliamentary Standing Committee Report on Draft Direct Tax Code, 2012

 Number of effective assessees

 Source: CBDT

The number of assessees fluctuates due to various reasons such as the closure of a business, demise of a taxpayer, retirement, change in economic activity affecting taxable income, etc. Additionally, several provisions of the Income Tax Act such as grant of additional exemptions/deductions, and increase in the basic exemption limit (for individuals & HUFs) also affect the number of taxpayers. As explained, with inflation, an increase in the basic exemption limit may indeed be necessary over time. That is why a policy to expand the taxpayer base from the self-employed as well as an increase in the rate structure at the top are needed to improve revenue performance.

The non-corporate taxpayer base has shown an annual average growth rate of 3.40 per cent for the period of FY2007-12. If one goes into various bands, the variation in the numbers is not apparent. For example, those with income of Rs.10 lakh and above decreased sharply from 5.79 lakh in FY2007 to 2.18 lakh in FY2008 but increased gradually to 6.57 lakh in FY2012. However, there is a more steady increase in the number of taxpayers in the categories of Rs. 5-10 lakh and Rs. 2- 5 lakh, with a significant rise in the latter from 38.36 lakhs in FY201 1 to 60.26 lakhs in FY2012. However, for taxpayers with income below Rs. 2 lakh, there is a moderate fluctuation in the number of taxpayers for the period FY2007-12. These patterns could be due to various reasons and an analysis of data in the hands of the income tax department could provide an explanation.

Source- TARC Report and as indicated above – Compiled by CA Sandeep Kanoi