Why Nicking The Non-Poor May Yield More Tax Than Just Mugging The Rich

It is usually assumed that the rich must be evading taxes more than the poor.  With their money clout, they can employ the best CAs, locate every tax loophole, and even keep money illegally in assets that can’t be easily discovered by the taxman. Ergo, the rich evade the most.

However, here is a counter-intuitive point: the number of evaders may actually be huge in terms of numbers – running into millions - at the bottom of the tax pyramid. This is one conclusion I find difficult to avoid for the simple reason that anecdotal evidence and the taxman’s own numbers point in this direction.

The Modi government recently released lots of taxpayer data, and one of the tables (Table 2.9, Range of tax payable income based on e-filed returns) shows the following:

#1: Some 1.62 crore people who filed tax returns, paid no tax. One wonders why they were even filing returns. There is thus a case for not fishing in fish-free ponds.

#2: Another 1.11 crore assessees in the sub-Rs 1.5 lakh range of tax payable income, showed tax payable of a massive Rs 23,446 crore (an average of Rs 21,000 each). This is big, as I will explain later. This is the single biggest taxpayer category of assessment year 2012-13 (which refers to financial year 2011-12, when the basic tax-exempt rate was Rs 1.8 lakh).

#3: In the very next bracket – the range of Rs 1.5-2 lakh tax payable income – the number falls drastically to just over three lakh, with collective tax payable being Rs 5,254 crore, for an average payment of Rs 1.74 lakh tax for the year.

We can obtain lots of gems and nuggets of information from reading the rest of this table’s data closely, but the big point that stands out is this: there is huge resistance at the bottom end of the income pyramid to enter the tax-paying stage.

Consider who all might be earning in the sub-Rs 1.5 lakh (tax payable) range. In 2011-12, the basic tax exempt limit was Rs 1.8 lakh, which means anyone earning a monthly salary of upto Rs 15,000 per month was tax-exempt. But anyone earning more than that would be taxable. This would bring most domestic workers (in most areas of Mumbai, a maid working in four houses could be earning that kind of money), not to speak of drivers, plumbers, carpenters, and other such people who earn in cash daily.

A colleague pays his driver pays Rs 16,000 per month, before over-time, and I am damn sure he didn’t think he had to pay tax. One reason why the 1.11 crore people in the sub-Rs 1.5 lakh (tax payable) bracket fall to just three lakh in the Rs 1.5-2 lakh bracket should be obvious – it is only those in the formal sector who file returns. This could include the thousands who serve in retail malls and as security guards, who are formally employed by companies, and excludes those who serve in the cash sector – informally employed domestics, and semi-skilled and skilled labourers who work for construction and real estate firms. They see no reason to file returns even when they may crossing the taxable threshold.

Not only this. The rural sector is almost wholly excluded, since agricultural and farm labour income is never taxed. So while there is surely big rural distress right now, it may be equally true that a very large mass of the rural rich pay no taxes at all. The only way to get them to pay is through indirect taxes.

So when economists say income tax in progressive and indirect taxes regression, they have to consider the point that in India indirect taxes may be important for raising taxes from those who ought to pay tax, but get exempted. Indirect taxes may be less regressive than they are claimed to be when seen in the context of who evades direct tax.

As I have noted earlier in Swarajya, in just the last one year, land purchases by the National Highways Authority of India (NHAI) involved paying nearly Rs 90 lakh-Rs 1 crore per acre for 22,000 acres of land. That should have created nearly 20,000-and-odd crorepatis (or near crorepatis), and we are not counting the thousands of acres of other land acquisitions and commercial purchases all over the country.

Contrast this with the Income Tax department’s claim that the country had only around 1.5 lakh people earning more than Rs 50 lakh annually. In AY 2012-13, the figure was just around one lakh.

The takeout is clear: our problem is that the tax base at the bottom is not being expanded fast enough.

The richer categories simply cannot yield the kind of gross that the bottom categories can due to the sheer numbers involved. Just as 1.11 crore return filers in the Rs 1.5-2 lakh tax payable income category delivered the highest amount of tax (Rs 23,446 crore), it is obvious where the richest haul will come from if your aim is to widen the tax base and bring in more direct taxes, especially income tax.

The second highest grosser among income categories was the Rs 5.5-9.5 lakh ange, which had tax payable of Rs 12,580 crore (see table), the third highest being the Rs 25-50 lakh income band, which had just 29,881 assessees delivering Rs 10,229 crore. There are only three categories yielding above five digits in crore – ie, above Rs 10,000 crore in tax payable.

All those who sold one acre of land last year will, this year, fall into the Rs 5-10 lakh category assuming they invest all their sales proceeds in bank deposits. The taxman should add them automatically to the list of potential taxpayers.

It sounds unfair to suggest that the biggest tax haul may yet come from fishing at the bottom of the pyramid, but this is what the taxpayer data tells us. The categories in the Rs 0-Rs 2 lakh tax range are not rich, but they are the non-poor.

If we can find a painless and taxpayer-friendly way of expanding the tax base, maybe through a route of presumptive taxation of workers (professionals were brought in in this year’s budget) in the informal sector, we will have done well. None of this suggests that the taxman should spare the rich; just that pinpricks at the bottom end will bring more than mugging at the top.