Why only 15 mil­lion pay tax

Business Standard - - FRONT PAGE - T N NINAN

While Mr Modi puts the blame on ci­ti­zens for the small num­ber pay­ing tax, ask­ing them to pay taxes hon­estly, he should also be blam­ing him­self or his fi­nance min­is­ter of 2019, who in the run-up to the Lok Sabha elec­tions that year ex­empted from tax all those earn­ing up to ~5 lakh, writes T N NINAN

The prime min­is­ter has drawn at­ten­tion to the fact that only 15 mil­lion peo­ple in In­dia pay in­come tax. He is right to com­plain, since more than that num­ber buy two-wheel­ers in a year. The two-wheeler pop­u­la­tion is about 180 mil­lion. The cheap­est scoot­ers cost about ~50,000, and the more pop­u­lar mod­els cost over ~65,000. It is there­fore not un­rea­son­able to ex­pect that some­one earn­ing enough to own a scooter or mo­tor­bike should be pay­ing in­come tax. Un­for­tu­nately, less than 10 per cent do.

So Naren­dra Modi is right to com­plain, but he is the wrong per­son to be do­ing it. For, while Mr Modi puts the blame on ci­ti­zens for the small num­ber pay­ing tax, ask­ing them to pay taxes hon­estly, he should also be blam­ing him­self or his fi­nance min­is­ter of 2019, who in the run-up to the Lok Sabha elec­tions that year ex­empted from tax all those earn­ing up to ~5 lakh. That al­lowed a re­ported three-quar­ters of all tax­pay­ers to get out of the tax net. Pre-elec­tion give­aways are par for the course, but Mr Modi should be con­scious that it was his choice to slash the num­ber of tax­pay­ers from 60 mil­lion to 15 mil­lion.

In­ter­na­tional com­par­isons are in­struc­tive. In the US, a sin­gle per­son starts pay­ing in­come tax at an in­come level of about $12,000, which closely par­al­lels the level of the poverty line for an in­di­vid­ual. Cou­ples fil­ing to­gether must earn twice that be­fore they are obliged to pay tax. Im­por­tantly, the tax-pay­ing thresh­old is about $25,000 for a four-mem­ber fam­ily, broadly the same level as the poverty line for such a fam­ily. There is logic to these numbers. The im­plicit prin­ci­ple seems to be that once you are above the poverty line, you should pay tax. That is the pic­ture in the UK as well. While the coun­try has many def­i­ni­tions of poverty, tax kicks in at broadly the level of poverty line in­come, which is about £12,000.

Com­pare this with In­dia, where the tax-pay­ing thresh­old is now mul­ti­ples of the in­come for a fam­ily at the poverty line. It is also twice the level of the house­hold in­come for an av­er­age fam­ily of four, at about ~2.5 lakh. This fig­ure was in fact the tax thresh­old till a year ago, be­fore it was dou­bled to ~5 lakh. The pri­mary prob­lem, there­fore, is not with the tax­payer; rather, it is with the tax rules that have taken the tax thresh­old to much too high a level. You would quadru­ple the num­ber of peo­ple pay­ing tax if the tax thresh­old were to be re­verted to its ear­lier level.

There is an is­sue with the tax rates as well. In­dia starts with 5 per cent, whereas in Britain the low­est rate of tax is 20 per cent. In the US, it is 10 per cent at the federal level, plus vary­ing rates at state lev­els. Here, ac­cord­ing to the lat­est rules, you have to reach ~10 lakh, or four times the an­nual in­come of an av­er­age fam­ily of four, be­fore you start pay­ing tax at 20 per cent. The fact is that in­come tax rates in In­dia kick in at too high an in­come level, and at un­usu­ally low rates.

The gov­ern­ment’s other fail­ure, it would seem, has been to carry through the cross-check­ing of tax re­turns with the spend­ing and sav­ing habits of the in­di­vid­ual con­cerned — like for­eign travel, ve­hi­cle own­er­ship, and level of elec­tric­ity con­sump­tion. Since the per­ma­nent in­come tax num­ber has to be dis­closed for most high-value trans­ac­tions, ef­fec­tive cross-check­ing should have been able to catch most tax evaders. While it is in­deed true that de­mon­eti­sa­tion and other mea­sures sharply in­creased the num­ber fil­ing tax re­turns, the over­all sit­u­a­tion to­day is man­i­festly dis­ap­point­ing.

The prime min­is­ter is there­fore right in what he said. But it is his gov­ern­ment that has added to the prob­lem. And it is in its power to change the sit­u­a­tion — if it has the stom­ach to ig­nore the in­evitable howls of protest from a very vo­cal mid­dle-class.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.