Back in 2016-17, only 3 per cent of the total population of India paid income tax. The data showed that only less than 50 per cent of the estimated number of doctors had been paying tax. The percentage is even less in the case of lawyers and chartered accountants.
However, in the Interim budget presented in February 2019 and in the 2019-20 budget speech, finance ministers showered praises on tax payers on account of a sharp increase in direct tax collections and expansion of tax base.
In this context, the question of whether direct tax collections improve in tune with the development of the country calls for a discussion. An important fact shared by finance minister Nirmala Sitharaman is that the number of tax payers got increased from 5.71 crores to 8.44 crores in the period between 2013 and 2018.
The percentage of increase is 48 per cent which indicates that the government's efforts to increase tax collections by enhancing tax base, without increasing the tax rate have born fruits.
The above figure also includes those who have not filed returns but whose tax has been deducted.
Here, it is to be noted that that all return filers are not tax payers. For example, out of the 4.66 crores of individuals who filed returns in 2017-18, 56 lakh return filers had a gross total income less than Rs 2.5 lakh. The income tax department data shows that 30 per cent of the total returns show a gross total income between Rs 2.5 lakh and Rs 3.5 lakh.
Thus, 42 per cent of the persons who filed returns are having a gross total income less than Rs 3.5 lakh. It means that after the deductions and rebates, nearly 40 per cent of the returns remained nil tax returns.
The analysis of past five years shows that the number of returns in the Rs 2.5 lakh- Rs 5 lakh category grows at an annual rate of 20 per cent.
The same growth rate is visible in Rs 5 lakh- Rs 10 lakh category also. This growth rate is promising. However, the full rebate declared in the interim budget may cause substantial reduction in the tax collection from these categories.
Another important fact disclosed by the finance minister is that direct tax collections increased by 78 per cent and reached Rs 11.37 lakh crore from Rs 6.37 lakh crore in 2013- 14.
Though this growth rate is good, it is less than the growth rate in direct tax collections during 2009-14. During this period, tax collections grew by 91 per cent and reached Rs 6.37 lakh crore in 2014 from Rs 3.34 lakh crores in 2009.
When we discuss the revenue from taxes, the analysis of the composition of direct taxes and indirect taxes is crucial. For a growing country like India, high proportion of direct taxes in the total tax revenue is considered desirable as indirect tax is a regressive tax.
But the proportion of direct tax came down below 50 per cent in 2016-17 that and it stood at 52 per cent in 2017-18. Further, no symptoms are visible to reach the 61 per cent which was reported in the year 2009-10.
The most worrying fact is that the corporate tax is not growing as expected. It is the main reason for not achieving the targeted tax collection of Rs 12 lakh crore in 2018-19. The rate of growth in corporate tax during the last five years is also less than that of 2009-14.
Coming to the composition of direct taxes, the proportion of personal income tax and corporate tax was 35 per cent and 64 per cent, respectively, in 2008-09. In 2017-18, it came to 41 per cent and 56 per cent.
The slow growth rate of corporate taxes denotes the slowdown of economic activities and decline in corporate profits.
The reduction in corporate tax in a phased manner is one of the declared objectives of the government.
It was in 2016- 17 that the government reduced the tax rate from 30 per cent to 25 per cent for companies having turnover less than Rs 50 crore.
In 2017-18, the turnover limit got increased to Rs 250 crore. As per 2016-17 statistics, the number of companies filing income tax returns was nearly 7 lakh. Because of the increase in turnover limit, only 1 per cent or 7000 companies remained in the 30 per cent rate slab. In this budget, the limit is again raised to Rs 400 crore.
This will adversely affect the growth of corporate taxes especially in the context of declining corporate profits and industrial production.
The average direct tax-GDP ratio of a developing country is 8-9 per cent. In India’s case it is le-ss than 6 per cent. The hig-hest ratio of 6.3 per cent was reported in 2007-08.
During 2001-08 period, the direct tax buoyancy factor of the country was above 2 in most of these years. It means that the growth rate of direct taxes was more than twice of the growth rate in the national income.
After 2008, it is not growing even proportionately. The issue of why the tax collections are not increasing as expected despite the widening of tax base and surge in GDP over the years is to be reflected upon.