If many people don’t pay taxes or find ways of paying no tax, those who pay honestly will bear the burden. I want to introspect every Indian – do you accept this? The Premier’s appeal is a result of India’s slowing tax collections, “said Narendra Modi at the beginning of last month. India has, partly due to slowdown in the economy and partly to changes in the tax system, struggled to raise taxes — which has severely limited the government’s ability to reignite the economy.
India’s Tax-to-GDP ratio, the overall measure of central and nation-wide revenue generation, was 17.1 percent, down from the average of its emerging-market counterparts in 2018-19 (20.9 percent). India is more focused than its peers on indirect taxes (taxes on expenditure) rather than direct taxes (taxes on income). Because direct income taxes are being imposed, they are more egalitarian and less harmful for the poor. But Indian direct tax share has declined because tax revenues have decreased overall. Gross tax revenue as a share of GDP fell in fiscal 2020 for the second consecutive year, according to updated budget estimates. This was also the greatest budget deficiency in the last 18 years.
Gross tax collections have declined in the last two years
FY20 tax collections saw the biggest shortfall (compared to the budget target) in 18 years.
Some of this deficit is self-inflicted: the reduction in corporate tax rates by the government meant that forecasts of tax revenue had to be revised. But even this revised tax collection estimate of € 21.6 trillion may be missed by the government. Historical trends indicate that by December the government collects approximately 68 percent of the total annual collection. If this is true for the current fiscal year, this year’s tax collections will probably be closer to 20 trillion dollar, some 6% below the estimated figures. That will mean that the government’s real tax receipts have fallen short of its revenue projections for the 12th time in the last 19 years.
This overestimation not only undermines the credibility of the fiscal exercise but also strains the tax system. Tax officials whose success is tied to the achievement of revenue targets are under pressure and maybe pressured to demand more from taxpayers. One natural result is recurrent tax disputes. Data from budget documents show that, as a percentage of gross tax revenues, the total tax disputed amount more than quadrupled from 11% in 2007–2008 to 46% in 2018–19. The bulk of the disputes (39 percent) focus on personal income and taxation of corporations.
Tax arrears have increased drastically in the last decade.
To resolve this, government has announced a new “Vivad se Vishwas” amnesty scheme aiming at resolving almost 480,000 cases involving contested tax amounts of € 9,32 trillion, but their impact is likely to be limited. “When people don’t have very strong cases, they’d like to come forward and resolve them. And figures are not in the government’s favour. According to the 2019 CAG audit reports, the overwhelming majority of the cases are decided in favor of the assessees in courts the tribunals.
” Once you settle pending cases, the tax authorities may also be disputing the same issue in the future and may re-examine your case. Maheshwari said that the solution of these tax disputes was merely a stop-gap agreement that did not address the structural issues within the Indian tax system. Furthermore, the direct tax base for Indian taxes is too small; in his speech earlier this month, the Prime Minister said that only 1.5 crores Indian individuals pay taxation.
Although the number of taxpayers increased in fiscal 2018.
Not even 5% of India’s working-age population contributes to the tax pool.
India not only has a small tax base, but also has an inclined market for the top income earners in the categories of personal income tax and corporate tax. Although few taxpayers were listed on top income, nearly two-thirds of taxes on personal income in the country were paid the richest 5% of the 2018-19 assessment year (the fiscal year 2018), with only about half of the total corporate income tax paid by the top 1% of companies. The overwhelming majority of tax filers are subject to zero tax liability.
Nearly two-thirds of personal income taxes in the country were paid by the richest 5% in the assessment year 2018-19.
Nearly half of the total corporate taxes were paid by just the top 1% of companies.
The government has largely resorted to aggressive tax demands and stop-gap measures, rather than initiating systemic reforms to revamp the tax system. The introduction of the Goods and Services Tax was intended as one structural reform but was even plagued by implementation problems. Until all this is resolved, India will continue to be limited in terms of its ability to increase much-needed revenues.
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