Budget 2016: FM Arun Jaitley must find ways to double income tax payers

While there is an urgent need to restructure the current income tax slabs, especially hiking the Rs 10 lakh limit for the highest rate of 30%, presumptive taxation for the unorganized businesses also needs to be looked at by FM Arun Jaitley.

As Finance Minister Arun Jaitley gears up to present the Budget for 2016-17 next month, one of the biggest questions that he needs to answer is: why in a country of more than 125 crore people, just about 3.5 crore are in the income tax net?

Several committees have questioned the failure of successive governments on this count, but the situation has failed to improve.

The Tax Administration Reform Commission (TARC) also raised this issue in detail in its report and also calculated that the number should be at least 6 crore.

Taking the population at 120 crore, it made a simple calculation: “Assuming a family size of 5, there are 24 crore families in India. Assuming, further, that 30% of the households earn only subsistence wages and another 20% are below the income tax threshold, there will be 12 crore potential taxpayers. If one-half of this is assumed to derive income from agriculture, there will be 60 million or 6 crore potential taxpayers”.

The parliamentary standing committee on finance in its report last month said that, ‘time has come to reinvent the tax collection approach i.e. to move towards the untapped or lesser tapped
brackets of income which mostly comprise the un-organised sector and the cash economy. For this purpose, the Committee would expect the Ministry to diligently use their manpower and other resources with a strict vigil over non-TDS income group and which are lying above Rs. 5 lakh annual income bracket’.

This is extremely critical as according to the finance ministry, ‘more than three out of four taxpayers is from the sub-five lakh bracket, while tax collection from this bracket is merely around 12% of the total tax collection’, the panel has pointed out.

Even though a comparison with the developed countries in terms of the income taxpayer base needs to take into account India’s overall income profile, the gap is considerably higher than it should be.

The TARC pointed out — only 3.3% of the population pays tax in India, which is very low compared to 39% in Singapore, 46% in the US, and 75% in New Zealand – and felt that the number here could be doubled to 7%.

While it is necessary to restructure the income tax slabs to encourage people not to suppress their income to pay lesser tax or no tax at all, one of the options suggested by the TARC is to opt for presumptive taxation to bring those into the tax net who are evading taxes by dealing in cash, mostly small businessmen and professionals.

It has rightly stressed that, ‘There are still a large number of individuals in businesses, trade, services and professions (especially in the unorganised informal sector and sectors where large scale transactions take place in cash) who are outside the tax net. Therefore, the presumptive profit estimation scheme should be reviewed based on appropriate analysis and its scope enlarged’.

In case of personal income tax slabs, FM Arun Jaitley would do well by announcing a plan on the lines of corporate tax, where the tax rate is to be brought down from 30% to 25% over four years beginning 2016-17 with phasing out of exemptions.

A Rs 5 lakh flat tax exemption limit for individual taxpayers and no other deduction with the 10% rate applicable between Rs 5 lakh and Rs 10 lakh annual income, 20% for income between Rs 10 lakh and Rs 20 lakh, and the 30% rate applicable to income above Rs 20 lakh, could be a possibility that can be looked at in a phased manner.

At present, Rs 2.5-5 lakh income is taxed at 10%, Rs 5-10 lakh at 20% and the 30% rate is levied on income above Rs 10 lakh.

This means the top rate kicks in at a considerably lower income which is seen as a reason for suppression of income.

Of course, these are hard choices, but instead of tinkering in the exemption limit year after year, it is time that the government opts for a stable and long-term approach, if it is serious about expanding the income taxpayer base.