Demonetisation and the tax base
by Sandhya Jain on 07 Feb 2017 8 Comments

The suspicion of many salaried professionals that successive governments have extracted unduly high taxes from those considered sitting ducks (persons in the formal economy with no escape routes), was vindicated, but not ameliorated, in Union finance minister Arun Jaitley’s budget speech of February 1. A reconsideration of income tax slabs to redeem the Prime Minister’s campaign pledge to reduce the burden of honest tax payers would be in the fitness of things.


Since independence, when income tax was first imposed upon citizens, tax evasion has been a way of life for many. Demonetisation was to bring all sectors of the economy into the banking sector, and tax net. While it is premature to expect the figures of those who should be paying taxes post-demonetisation to reflect in the Budget speech (which would have been under finalisation while demonetisation was underway), a much wider tax base is expected to materialise during the financial year 2017-18. Hence, a more generous tax structure was a legitimate expectation.


Some information that has recently come into the public realm deserves notice. The finance minister pointed to discrepancy between rising car sales and growing number of Indians travelling abroad, and the paltry number of high income taxpayers. He observed, “Of the 76 lakh individual assessees who declare income above Rs 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore cars have been sold, and number of Indian citizens who flew abroad, either for business or tourism, is 2 crore in the year 2015.”


It follows that the number of assessees in financial year 2017-18 must rise from 76 lakh to at least two crore, which too, is paltry for a country of India’s size and economy. Unless the entire population is below poverty line, it is a safe bet that at least 5 per cent should be high net worth individuals (annual income above Rs 50 lakh), at least 30 per cent middle income bracket and at least 30 per cent entry level tax bracket (at existing exemption levels). That leaves roughly 35 per cent, which includes the poor and marginal, unemployed, youth /students and the exempted farm sector (including rich farmers).


Financial planning that does not think in such broad strokes will never control or kill the black economy. The finance ministry will have to dig deeper, collate data from each sector, to make us a truly tax compliant economy.


Jaitley’s observations are well known. Complaints about the growing number of government employees whose families were taking tour packages to destinations like Singapore, Hong Kong and Dubai, and returning laden with goods, had prompted then finance minister P. Chidambaram to put such persons on a watch list. Things do not seem to have improved much since, but the post-demonetisation scenario must change dramatically.


Revenue secretary Hasmukh Adhia has revealed that over two-thirds of the demonetised currency deposited in banks, roughly Rs 10.38 crore, came from deposits of over Rs 2 lakh. As Government had initially said the income tax department would not trouble people depositing up to Rs 2.5 lakh into their bank accounts, many made deposits of around Rs 2.25 lakh, in multiple accounts. Many accounts were operated against a single PAN number. However, the exemption limit of Rs 2.5 lakh per individual was mainly intended to cover the genuine savings of housewives.


A far greater scrutiny of shell companies is warranted. Recently, a cash deposit of Rs six crore in a bank account unearthed a huge internet scam by a Noida-based firm. As Uttar Pradesh police arrested three top employees of the company, who had duped nearly seven lakh persons by promising handsome returns for clicking on certain web links, tax authorities discovered that the firm was not doing any real business, but was luring investors (who paid thousands of rupees to join the scheme) and rotating their money. The firm’s turnover jumped to Rs 3,700 crore in 2016-17, from just Rs 26 crore the previous year. There would be thousands of such companies across the country, which can be unearthed with due diligence.


The budget has reduced tax on income between Rs. 2.5 lakh and Rs. 5 lakh from the present 10 per cent to 5 per cent, and slashed the rebate of Rs. 5000 on income between Rs. 2.5 lakh to Rs. 3.5 lakh to Rs. 2500. Thus, for income up to Rs. 3 lakh, tax would be zero and those earning Rs. 3.5 lakh would pay Rs. 2500. Those earning above Rs. 3.5 lakh would save Rs. 12,500 in tax – a niggardly concession. Ideally, the exemption limit should have been raised to Rs 5 lakh, as suggested by some columnists, and subsequent slabs revised upwards.


This would put more purchasing power in the hands of citizens, stimulate spending, and bring some much-needed buoyancy into the market. At a time when all citizens are being coaxed into the tax net, a tax of 10 per cent for income up to Rs 20 lakh, 20 per cent for income up to Rs 50 lakh, with surcharge for income over Rs one crore, would better meet the needs of the economy and be fair to compliant citizens.


The reduction of presumptive income tax for small and medium trades/businesses with a turnover of up to Rs. 2 crore, from 8 per cent of turnover to 6 per cent in respect of turnover received by non-cash means, is needless nitpicking. Bifurcating turnover into cash and non-cash will inconvenience traders and customers. Instead, market associations should ensure that every shop makes sales by computerised billing only.  


Finally, the finance minister promised to cut corporate tax from his first budget. But in the fourth budget, tax has been cut from 30 to 25 per cent only for companies with a turnover of Rs. 50 crore (this reportedly benefits 96 per cent companies). Yet it is the remaining larger companies that pay the bulk of taxes and were looking forward to the promised reform.


This exemption could have been shared across the board as one objective was to enable Indian firms to compete with their Association of Southeast Asian Nations (ASEAN) peers. Presently, companies benefitting from the reduction do not typically compete with ASEAN firms. Overall, an unexciting budget whose most redeeming feature is the absence of nasty surprises.     

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