Of the 3.65 crore individuals (filing returns in the assessment year 2014-15) that is less than 4% of the 760 million adults enumerated in the 2011 Census. More than half these individuals paid no tax at all. That the country’s direct tax base is dizzyingly narrow is an often stated problem. Due to the failure in bringing enough well-off Indians into the direct tax net, the country has been mobilising revenue through indirect tax collection. In 2015-16, direct taxes contributed only 51% of the tax revenue, lower than in recent years (and even the government’s expectations) and the lowest since 2007-08.
The income tax data collated shows only 48,417 persons reporting income of more than Rs 1 crore in a year. Yet luxury brands like BMW, Jaguar, Audi, Mercedes, Porsche and Maserati sell almost 35,000 cars every year
An increasing share of indirect taxes in total revenue collection is cause for alarm because indirect taxes affect all Indians alike, rich and poor. Indeed, given that the poor generally spend a greater fraction of their income on essentials than the rich do, with wider indirect taxation, they end up paying a higher individual tax rate than people considerably wealthier. For a start, policymakers should to reframe tax governance priorities and rejig the direct-indirect tax ratio more equitably and progressively.
It is not just that indirect taxation needs to be rationalised. It is clear from the income tax return statistics that direct taxes continue to be evaded in substantial measure.
Taxation is a core element of modern citizenship in democracies. India may have chosen taxation as citizens’ central obligation, but its direct tax revenue base is too narrow — an uncomfortable position for an economy steadfastly trying to scale up social and infrastructure investments while maintaining a semblance of fiscal discipline.
The government needs to push through meaningful reform like taxing large farm incomes and rationalising bounties enjoyed by the well-off, to widen the base.
Most importantly, however, it needs to match the databases already available to prevent tax evasion, something that only needs political will.