Tax Research Cell of National Institute of Public Finance and Policy (NIPFP) has released a report on ” Development of an Analytical Model for Widening of Taxpayer’s Base”. This study was undertaken for the Central Board of Direct Taxes to analyse and develop an Analytical Model for the number of taxpayers in the personal income tax system. The Terms of Reference of the study is reproduced below.
The focus of this study was on the number of personal income tax payers. Two ideas implicit in the conception of this study are: first, that the number of filers in the system is smaller than the number that “should be” filing; and second, the number of filers should be increasing over time.. Economic growth and other related variables should drive changes in the number of filers. These two ideas have been used to formulate the structure of analysis for the present study.
Conclusion of Study Report
Chapter 1 of the study examines and compares the available data sources. In view of the limitations of such data sources as discussed in detail, the study carries out the time series analysis using CAG data on number of assesses while the cross section analysis has been carried out using the Indian Human Development Survey for individuals and the NSS Survey on Unincorporated Non-agricultural Enterprises (Excluding Construction) in India.
The time series analysis of the total number of taxpayers in the categories of firms and individuals, in chapter 2 reveals that:
While the time series analysis reveals that the total number of taxpayers has increased and that there are variables which explain the change in these numbers, it is also important to understand the underlying distribution. In chapter 3 we compared alternate sources of information and arrived at a broad conclusion that the number of taxpayers as calculated is higher than that reported by the income tax department. But the difference is not very large for individuals but is substantial for firms.
To examine whether there is close correspondence between income tax data and the data from the survey across income and activity classification, chapter 3 presents results on profiling of taxpayers. These results suggest that while in lower income groups the survey shows much larger numbers than the income tax department data on returns, the differences disappear and even reverse themselves in the higher income categories. This holds both for individuals and firms. For the individuals, the differences are concentrated in the categories with incomes less than 4 lakh per annum while for firms, these are concentrated in the income groups with income less than Rs 10 lakh. This result suggests that while the overall number of taxpayers might not be at wide variance, there is considerable scope to increase the numbers in the lower income categories.
In the activity wise profiling, with the caveat that significant number of returns do not contain information on activity code, the composition indicates that in the survey some manufacturing sectors and food and beverage services show up more prominently than in the returns. Similarly, in the case of individuals, in manufacturing, trading, building and estate agents and services sector, the share in the survey is higher than the share in the ITD returns. Sectors like professionals and commission agents are not that common in the survey. These results too indicate that there could be some scope for expanding the number of taxpayers. However, more focused identification of sectors has been hampered by the non-availability of data.
Chapter 4 provides some models for predicting the number of effective assessees. This is followed by an economic model to understand the conditions under which individuals might prefer not to file a return. The results from this chapter can be summarised as follows:
Using the results we have obtained in the study so far, chapter 5 presents some suggestions on how to bring in the non-filing taxpayers into the system. These suggestions are grouped into three categories. To begin with, it is essential to have a clear policy perspective on whether the tax department wants to concentrate on revenues alone and hence concentrate on revenue yielding tax payers who also happen to be from higher income groups, or whether the marginal taxpayer too needs to be brought in to improve the culture of compliance. Once a decision in favour of the latter is taken, there are a series of policy and administrative decisions that can aid in reducing non-filing. The policy measures can be summarized as
In addition the chapter also proposes some administrative measures. These can further be divided into two categories – those that could further augment the cause of “enforced compliance” and those that could aid “voluntary compliance” as formulated in the literature on slippery slope. To begin with measures suggested to augment “enforced compliance” are:
Turning to measures to support voluntary compliance, the study has identified the following measures:
Download report – http://www.nipfp.org.in/media/medialibrary/2015/10/Development_of_an_Analytical_Model_for_Widening_of_Taxpayers_Base.pdf
Link for comments – http://www.nipfp.org.in/publications/reports/1399/