RAISINA HILL
The Narendra Modi government has reasons to compliment itself on the way it has succeeded in bringing more people under the direct tax net. The indirect tax net is also getting wider because of a rise in the number of entities getting registered under the goods and services tax (GST). But the full impact of the GST initiative on widening the tax net will become clearer perhaps by the end of this year. For the present, however, the latest numbers released by the finance ministry are ample testimony to how more direct taxes are being paid and more people are filing tax returns.
For the 2016-17 financial year, the number of tax returns filed by the end of the last date of submitting such documents jumped by about 24.6 per cent to reach an impressive number of 28.3 million. Similarly, the latest direct tax collections for 2016-17 are estimated at ~8.5 lakh crore, marginally higher than what was presented in the Revised Estimates in the last Budget.
However, a closer reading of these numbers pertaining to the returns filed and the taxes collected reveals trends that have not yet been highlighted either by the government or any tax analysis. Indeed, these trends provide a new perspective on the government’s claims on widening the direct tax net.
One, individual tax returns did go up by 25.3 per cent by the end of August 5, the last date for filing returns this year. But returns filed by non-individuals (which will include firms, companies, associations of persons, bodies of individuals and Hindu undivided families) saw a drop of about 10 per cent during the same period.
What led to this drop even as individual filing of returns went up by 25 per cent? Granular data are not yet available. But it appears that the crackdown on shady or non- operating companies, used largely for engaging in questionable transactions, has had an impact on this segment of the economy. The cancellation of over a million duplicate or multiple permanent account numbers belonging to the same person or entity may have also led to the disappearance of many of those who used to file returns earlier, but now no longer exist. But there is need for greater clarity on how there was a 10 per cent drop in filing of returns by non-individuals.
The latest tax collections data for 2016-17 have some more surprises in store for those tracking public finance. Yes, personal income tax collections rose by 21 per cent, compared to eight per cent in the previous year. Corporation tax collections too rose by seven per cent, compared to six per cent in 2015-16. But the surprise comes from the states that saw the highest growth in collections. Remember that 2016-17 was the year of demonetisation and the spurt in personal income tax collections was attributed to a great extent to the annulment of 85 per cent of high-denomination currency in circulation on November 8, 2016.
Among the major states with big towns, Haryana, with Gurgaon under it, accounted for a rise of 21 per cent, followed by Karnataka and Tamil Nadu each with a growth of 19 per cent. West Bengal showed a rise of 18 per cent, followed by Gujarat at 14 per cent. In sharp contrast, Maharashtra and Delhi that together account for almost half of the country’s total direct tax collections grew their contribution last year by only nine per cent and seven per cent, respectively. Is it only a base effect or are there other reasons that need to be explored?
Finally, there are two areas of concern. One, direct taxes as per cent of total tax collections reached a 10-year low of 49.66 per cent in 2016-17. The declining trend has been noticed since 2009-10, when it peaked at 61 per cent. But the sooner the trend is reversed, the better it would be for the health of India’s public finance.
Two, tax deduction at source contributes about 35 per cent and advance taxes account for about 41 per cent of total gross direct tax collections. Taken together, they account for more than three-fourths of total direct tax receipts of the Centre. This raises the obvious question on the cost of collections estimated at 0.66 per cent in 2016-17, marginally higher than what it was in 2015-16 and measurably higher than 0.57 per cent in 2013-14.
Of course, the collection cost has declined from 1.36 per cent in 200001, but with the rapid spread of digitisation and technology, there is every reason to expect a further drop in the collection cost. Questions, therefore, need to be raised on the effectiveness of the 73 per cent increase in manpower strength for the direct taxes department last year.