By Shivaji Sarkar
Almost 81,000 Indians earned over Rs 1 crore a year, screams Central Board of Direct Taxes (CBDT). Is there really anything to cheer about? The other side of it is that the number of non-salaried taxpayers has increased but it is the salaried, who bear the tax brunt. The figures also are upbeat on 15.7 percent rise in tax collection. But it conceals the rise in refunds.
Up to 20 October, direct tax collections for 2017-18 was estimated at Rs 4.9 crore against Rs 4.2 crore a year back. The number of refunds almost doubled to two crores and amount increased from about Rs 70,000 a year to Rs 1.1 lakh crore. It means the tax collection cost has increased. That stymies individual expenses and hurts growth.
Each refund has an administrative, compilation and transaction cost. By simple logic as the number of refunds doubled, all these costs have also. It also means the tax department is overstaffed and needs to reduce its flab. The tax administration cost is higher than the cost of refunds.
The effective taxpayer increased, at least notionally because all filers of returns do not pay taxes, from 6.47 crores to 8.27 crores, says Finance Minister Arun Jaitley. In the last two years revenue collected made the Government richer by Rs 90,000 crores, Rs 45,000 crores a year.
The spend towards tax collection at Rs 1.1 lakh crores more in 2018-19 is 4.32 per cent of the total Government spending. The cost has increased by 35.75 per cent. So more the Government earns more it loses too.
A NIPFP study by Arindam Das Gupta in 2000-01 found that compliance cost is high. The cost borne by taxpayers is 6.8 per cent of gross income or 49 per cent of personal income tax collections. If third party compliance costs, like those of employers and banks, are added, this rises to 56 per cent of taxes collected.
The third party costs of deducting tax at source (TDS) amounted to 11.8 per cent. It is borne by the employers. The third party costs constitute 53 per cent of total collections and 60 per cent non-company income taxes 1999-2000, says Das Gupta quoting CAG report 2001. The cost exceeds sometimes even tax paid, says Das Gupta.
An important reason for the “low compliance costs” of salaried employees is because their employers bear the costs of assessing and form 16A.
In simple terms it increases business expenses. All Government departments are spending enormously on this count. So whatever the Government is earning, it is losing on the implementation of an irrational procedure.
The aim of TDS itself is questionable. It is irrational because the Government is realizing a tax that is not due to it before the end of a financial year. It is also not paying any interest on TDS. How can a tax be deducted even before one utilizes his earnings? The worse is it deprives an earner of his right to spend and contribute to the growth of the economy. On an average over four months wages are locked up in TDS or simply put it is never paid.
The TDS is locking up huge direct and indirect finances that could have been utilized for productive purposes and enrich the economy. This loss has to be quantified. In other words, if TDS is abolished, the Government and all other employers would save huge compliance cost that would add to growth.
Das Gupta found that bribe quantum is high especially for non-salary earners but was not less for salaried earners either.
Even now despite online filing it has not been eliminated. There are allegations that post-demonetisation harassment has increased. It has now even engulfed rural and semi-urban areas.
Then there is the commercial cost to the banks. As per Das Gupta commercial costs to the banks is at 11 per cent. The banks however say they spend double that amount or 22 per cent. The banks thus are subsidizing Government expenses. Or the bank depositors are bearing the cost by arbitrary reduction of interest rates on deposits and increases in fees and other charges.
This is retrograde. The direct taxes are leading to indirect levying of charges on the same taxpayer. This apart, by forcing banks to subsist Government expenses it is adding to NPAs indirectly.
Banks are public entities not Government bodies. The Government is only a managing authority and has no right over the deposits or earnings of the banks. Should it have unfettered rights to tinker with its functioning or deny the actual charges?
The estimates, as per the NIPFP study, of compliance costs are high by international standards equaling at the median 130 per cent of taxes paid. With the rising numbers of taxpayers it can only be estimated to have increased. It means the rationale of income tax itself is doubtful, if not retrograde.
This apart there is little to rejoice at the number of crorepati taxpayers. Most of them after paying over 33 per cent IT lose a sizeable sum and do not remain crorepatis.
The tax rates are constant. It does not take into account the inflation, which has risen by over 60 per cent since 2010. Asking someone with low income of less than Rs 3 crores to part with 33 per cent of his income is itself questionable. Even the Economic Survey 2017 found that majority of the new taxpayers is at the threshold level of around Rs 2.7 lakhs. The cost of filing and keeping records is more.
Should not we link I-T to price index? If inflation increases, the benefit should be given to the taxpayer. That further questions the rationale of having such tax.
The 2001 study is clear on bribes. It says that bribes remain an integral part of the tax system whether for the salaried or non-salaried. On silly issues, the I-T appellate is flooded with cases. The irrationality of refusal is there even where the norms are appropriate and clear. Many interest subventions are denied on virtually no ground.
It takes 15 years of toil to be settled by the appellate because the department finds it convenient in not accepting the plea that the date of allotment, an established norm, should be adhered to for such decisions. It is not done to “settle” it. It does not need an elaboration.
So if I-T is abolished, the Government and society saves more and frees it of apprehensions and can spur the economy.—INFA