Increase in Tax Returns and Income Tax Base

Increase in Tax Returns and Income Tax Base
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Increase in Tax Returns and Income Tax Base

Despite government press releases, as of August 2017, there doesn’t appear to have been a substantial increase in the number of new tax payers or direct tax collection as a result of demonetisation.

Representational image. Credit: Tax credits/ Flickr CC BY 2.0

On the morning of August 8, most of our newspapers – both national as well as regional ones – ran headlines about the giant leap in the income tax returns received as well as the increase in advance direct tax collections. The media has attributed this huge achievement to the demonetisation move executed by the government. Finally, it appears, the nation has started to reap the benefits of demonetisation.

However, the fact checker in me became curious with the claim of a 24% jump in the number of returns filed. Also the figure of  “2.82 crore returns filed in this assessment year” did not look so huge because I had delved into this data earlier for an article titled ‘Why Duplicate PAN Cards Are Not as Big an Issue as the Modi Government Claims‘.

New definitions of tax payers

What added to the confusion was that the ruling government recently redefined the terms “tax base”, “tax payers” and “new tax payer added” which adds  the “number of persons from whom the TDS/TCS deductions are made” to the “number of returns” received in a year. This change was effected by accepting the ‘Report of the Committee for recommending standard definitions of certain terms‘, chaired by Avadhesh Kumar Mishra.

So, it’s more than slightly confusing as to why the government is going back to the term “number of returns filed” rather than the “number of total tax payers”.

On March 1, 2016, in the Rajya Sabha (QN no. 557 asked by Sri. Bhupender Yadav), the government answered that during the AY 2013-14 (FY 2012-13), 2.857 crores individuals in the age group of 25 to 60 years filed income tax returns. No information about the total number of the returns filed in that particular year was shared in the answer. But even this part data of 25 to 60 years age groups of 2.857 crores in FY 2012-13 is higher than the figure of 2.82 crores for the last financial year that was put out by the income tax department and reported on by most mainstream media.

CBDT press release dated August 7

Let’s scrutinise the press release by the CBDT dated August 7 2017, to separate the wheat from the chaff. Most newspapers carried headlines based on the above press release. CBDT made an odd comparison of returns filed as on August 5 with the returns filed during the corresponding period in previous year. Normally, CBDT makes such comparisons based on financial year or assessment year rather than midway on some odd date like what they did in the press release. American writer Rex Todhunter Scot once said, There are two kinds of statistics, the kind you look up and the kind you make up.” Of course, skewed statistics are always misleading and give a distorted picture.

The last date for filing income tax returns by the individuals and Hindu Undivided Families (HUF) for this AY 2017-18 was extended from July 31 to August 5. At the same time, the business assessees who needs mandatory auditing can file their returns up to September 30. If we look at the income tax return statistics for AY 2014-15 (which is the latest of the assessment year for which such detailed information of assessees is available as of today) at the CBDT website, the first group comprises 96% of the total assessees who should file returns within August 5. The number of assessees under business entities, who are yet to file returns, are a marginal 4%. Though returns can be filed after the due date, it will attract interest and penalties. A new section 234F inserted into the Income Tax Act, 1961, in this regard imposes a heavier fine and makes it more rigid.

Number of tax payers and returns

Though this part data comparison of 2.82 crores returns as of August 5 with corresponding previous year did not hold good, it is important to look at the  number of actual returns submitted in the previous years for a comparison consider the fact, 96% of the returns should be filed within August 5 deadline. For this, I have relied on the CAG Report No. 2 of 2017, Department of Revenue – Direct Taxes (See Table 1.3, at Page 3), which gives the number of actual returns filed by the non-corporate assessees between FY 2011-12 to FY 2015-16. The foot note in the table clearly indicates that the above “figures are based on the actual returns filed during the respective year”.

From the above table, it is clear that the actual number of returns submitted by the non-corporate assessees during the last financial year is 3.98 crores. Due to PAN-Aadhaar linkage insistence and other reasons, a vast majority of individuals filed their returns before the deadline of August 5. Even then the number is 2.82 crores as per the press release of CBDT, which is only 71% of the total non-corporate assessee returns filed in previous financial year. This data clearly indicates there is no big jump like 24% as claimed is going to happen in the number of returns to be filed within this assessment year. Of course, we have to wait till the end of this assessment year to know the final figures of the same.

The above inference is based on the figure of effective assessees for AY 2016-17 (FY 2015-16) published by the CBDT as “Income Tax Department Time Series Data Financial Year 2000-01 to 2016-17” (See Table 1.7 at Page 9). This data is including the “number of people who filed returns” plus “number of people from whom TDS/TCS are deducted” as per the new definition approved by CBDT (See the note at the bottom of the table). We should take note that the total number of returns are nothing but a subset of this data of number of effective assessees. There should be corporate/business entities return will be added to this figure, but that number was just around 16 lakhs during the AY 2014-15, comprising hardly 4% of the total returns.

So let’s look at this data to see the trend of the number of effective assessees till FY 2015-16 (AY 2016-17). The graph shows that the year-to-year growth of the number of effective assessees is falling from 11.78% in AY 2013-14 to 7.08% in AY 2015-16 where final data is available. The provisional data for AY 2016-17 shows that it is further declined to 2.34%. So a comparison with last couple of years is imperative to compare the present AY figure rather than a part data with FY 2015-16. The ‘effective assessees’ show a downward trend from a year-to-year growth of 11.78% in 2013-14 to last three consecutive years. So any comparison with AY 2016-17 (FY 2015-16), which shows one of the lowest year-to-year growth, is not going to give you any correct picture. All these indicators and “part data of 2.82 crores returns” released by CBDT for last FY 2016-17 clearly denotes that there is not any substantial jump in the total number of effective assessees or number of returns filed, if we consider the whole financial year or assessment year as the yardstick for comparison.

Another document which leads light into the number of tax payers is the Economic Survey Vol. 2 (See Page 22). It makes important observations:

1.85 Did the signalling effect of demonetisation — namely that there would be decreased tolerance of tax non-compliance highlighted in the Union Budget for 2017- 18 – have an impact on tax compliance? According to the tax data, the number of new individual tax payers (based on returns filed) increased from 63.5 lakh in 2015-16 to 80.7 lakh in 2016-17. But all this increase cannot be attributed to demonetisation because there is some natural trend increase in new taxpayers. Instead, this impact by measuring the increase in taxpayers in the post-demonetisation period relative to the increase in the same period the previous year is estimated.

1.86 As the Table 6 shows, the growth of taxpayers post-demonetisation was significantly greater than in the previous year (45%t versus 25%). The addition amounted to about 5.4 lakh taxpayers or 1% of all individual taxpayers in just a few months. The addition to the reported taxable income (of these new payers) was about Rs 10,600 crore. So, the tax base did expand after demonetisation. It is, however, interesting that the average income reported of the new taxpayers – Rs 2.7 lakh – was not far above the tax threshold of Rs 2.5 lakh, so the immediate impact on tax collections was muted. The full effect on collections will materialize gradually as reported income of these taxpayers grows.”

Here, the Economic Survey is trying to be modest, but at the same time attempting to prove that there is some influence on demonetisation. Economic Survey put the number of new tax payers have increased after demonetisation as 5.4 lakhs or just 1% of all individual tax payers. This 1% may be a round off to the single digit with respect to the total tax base, because we have seen from the other table that 6.27 crores total tax payers are there in FY 2015-16. But even the Economic Survey conveniently shut its eyes to the number of tax payers added in the previous year 2014-15 where in 76.04 lakh new tax payers were added, while last year added only 80.7 lakh new tax payers and which was compared with 2015-16 figure of 63.5 lakh.

Please see the Annual Report of the Ministry of Finance (FY 2015-16, Page No.155). So even the modest figure looks gloomy in this background. So if one correlates it with FY 2014-15 data, instead of the FY 2015-16 figure, we can see that additional tax payers added will shrink to just 1.4 lakh people.

So final take is that there is nothing substantial to boast about the new tax payers added due to demonetisation as the number is so insignificant. Once CAG finalises the audit of FY 2016-17, we will get a real picture and we can wait for the same.

Direct tax collection

Tax revenue resources of the Union government consist of revenue receipts from direct and indirect taxes, which are now almost in the ratio 1:1 for the last financial year as per CBDT statistics.

  • Direct taxes levied by the government mainly comprises:
  • Corporate Tax levied on income of the companies;
  • Income Tax levied on income of persons (other than companies);
  • Other direct taxes incl Wealth Tax, Securities Transactions Tax, etc.

As per the latest data released by CBDT, these taxes are distributed as Corporate Tax (57%), Personal Income Tax (41%) and other direct taxes (2%).

There are different mode of direct taxes collection (tax deducted at source (TDS), advance tax, self-assessment tax, regular assessment tax) in respect of both corporate and income tax. Collection through advance tax, self-assessment tax and TDS is largely indicative of degree of voluntary compliance in the system. Collection of tax through regular assessment mode occurs on assessment. The division various components of direct taxes for FY 2016-17 is as shown in the pie chart.

CBDT press release made another claim on direct tax collections:

“The effect of demonetisation is also clearly visible in the growth in Direct Tax Collections. Advance Tax collections of Personal Income Tax (i.e. other than Corporate Tax) as on 05.08.2017 showed a growth of about 41.79% over the corresponding period in F.Y. 2016-2017. Personal Income Tax under Self-Assessment Tax (SAT) grew at 34.25% over the corresponding period in F.Y. 2016-2017.”

So this statement is talking about a convenient truth, that too about a part data series. “Advance Tax” is around 41% of the total direct tax component, as we see from the above pie chart. Then “personal income tax” is also 41% of the total direct taxes. So here, CBDT conveniently talking about 41% of personal income tax component of the advance tax, which is also 41% of the direct tax. Hence, the net effect of the advance tax of the personal income tax component comes around 16% of the total direct tax collection. Similarly, self-assessment tax is just 8% of the total direct tax collection and when we consider its personal tax component, it will shrink to 3.3% of the direct tax collection. So here, the CBDT is just doing cherry picking of the 20% of value of total direct tax collection and comparing it with some arbitrary date, while totally silent about rest 80% of value.

Why CBDT is not speaking about the corporate tax and other components or about the entire direct tax component instead of this cherry picking? The answer lies in another press release by CBDT dated July 6, 2017, soon after first quarter direct tax collections ended in June 2017.

Closely examine the first paragraph:

“The provisional figures for direct tax collections up to June, 2017 show that net collections are at Rs. 1.42 lakh crore which is 14.8% higher than the net collections for the corresponding period of last year. Net direct tax collections represent 14.5% of the total budget estimates of direct taxes for F.Y. 2017-18 (Rs 9.8 lakh crore).”

Here, the picture is clear, the direct tax collections grow at 14.8% than the corresponding quarter during previous year. But please look at the larger picture, the government was in receipt of only 14.5% of total budget estimate for FY 2017-18 in the first quarter, wherein the collections should be around 20% normally. CBDT was able to collect only Rs 1.42 lakh crores towards direct taxes in the first quarter against the estimated budgeted target of Rs 9.8 lakh crores for FY 2017-18. This is an under realisation of the estimate target? I am leaving the answer to your own judgement.

But this warrants a close examination of direct taxes collection over the last six years and its year-on-year growth, which is provided by CBDT in “Income Tax Department Time Series Data Financial Year 2000-01 to 2016-17” (See Table 1.1 at Page 2).

So the total direct tax collection recorded during the first quarter at 14.8% is only a marginal improvement over the last FY’s year-on-year growth component of 14.54%. From the above graph we can see that the direct tax collections showing a steady upward trend from 2011-12 (10.7%) to 2012-13 (13.6%) to 2013-14 (14.24%) during the UPA-2 regime under Manmohan Singh. But during the NDA regime under Narendra Modi, the year-on-year growth fell to 8.96% in 2014-15, 6.63% in 2015-16 and shows some recovery of 14.54% during 2016-17, but it is based on a low base in 2015-16. If the direct tax collection followed the same trend in the Singh era, take it as 14% for next three years, it would have touched Rs 9,46,108 crores instead the present collection of Rs 8,49,818 crores.

Also the figure of Rs 8,49,818 crores should be taken with a pinch of salt as there was an Income Disclosure Scheme (IDS-2016), which resulted a disclosure of Rs 65,250 crores prior to the demonetisation. As the tax collected from this scheme is 45% of the disclosed amount, it would be Rs 29,362.5 crores. Also it is mandatory to pay 50% of the above tax in two instalments in the last financial year and remaining 50% before this September end. So there was a component from IDS amounting to Rs 14,861 crores was part of the direct tax component in last financial year. I am not considering the Pradhan Mantri Garib Kalyan Yojana which was announced after demonetisation, which turned out to be a damp squib. According to newspaper reports, the direct tax collected under this head was only Rs 2300 crores though it was expected to collect anything between RS 50,000 crores and Rs 1,00,000 crores. So if we remove the component of IDS-2016, the direct tax increase of year to year even from a low base of FY 2015-16, is reduced from the 14.54% to 12.56%.

To summarise:

  • Any amount of increase, even the marginal 5.4 lakh new tax assesses or 1% of the total income tax base presented in Economic Survey will further shrink to just 1.4 lakh tax payers, if it is corroborated with FY 2014-15, wherein 76.04 lakh new tax payers were added to the tax base.
  • Tax collections were already under a steady growth till 2014 and in fact was growing 14% in FY 2013-2014. But it had a sharp drop in FY 2014-15 and FY 2015-2016 period, which has now rebounded to FY 2016-17 to above 4%. But if we consider the contribution due IDS-2016, this will further drop to 12.56%.
  • Taking above two together, there is neither a sudden surge in number of people paying taxes nor amount of taxes that are collected by the government which can be seen as a breakthrough. For that, we have to wait for few more, hoping that the government doesn’t change the methodology in between.

So, the hard data from the CAG, CBDT and MoF proves that there has been no substantial increase in the number of new tax payers or direct tax collection due to demonetisation. The CBDT with its selective press release, helped the government to manage headlines. As usual, our mainstream media became mere stenographers and amplifiers that carried the news with thick headlines without checking the facts.

This article originally appeared on Decipher the Demonetisation. It has been republished here with permission.

Categories: Business, Digital, Economy, Featured

Tagged as: advance taxes, CBDT, corporate taxes, Demonetisation, direct taxes, GST, Income Tax Returns, James Wilson, Rajya Sabha questions

Increase in Tax Returns and Income Tax Base
Increase in Tax Returns and Income Tax Base

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