Explained: As PM Modi Launches Platform To Honour Top Taxpayers; Here’s All About India’s Tax Statistics

Prime Minister Narendra Modi today (13 August) launched the platform for "Transparent Taxation - Honouring the Honest" via video conferencing.

"At 11 AM on Thursday, 13 August, the platform for "Transparent Taxation - Honoring the Honest" would be launched. This adds strength to our efforts of reforming and simplifying our tax system. It will benefit several honest taxpayers, whose hard work powers national progress," PM Modi had earlier tweeted.

Last year, reports had come out that the government was planning to reward top income taxpayers, which could include an invitation to tea with the finance minister or the prime minister, among other non-monetary incentives.

India’s tax statistics

Direct tax in India consists of Personal Income Tax as well as Corporation Tax. The Economic Survey 2016-17 points out that India’s direct tax to GDP ratio is 5.4 per cent, way below than that of comparable countries, and has barely budged since 1991.

OECD members have an average of 34 per cent tax-GDP ratio.

In the last fiscal, the direct tax to GDP ratio fell to its lowest in 14 years, at 5.18 per cent. Personal income tax makes for less than 2.5 per cent of the GDP.

In India, very few pay direct taxes. There is one direct tax payer for 16 voters. Around six crore file IT returns, and around 5 crore of them pay practically no tax.

A famous economist had once said that only one percent of Indians pay taxes, if India had a libertarian government, it would have been a libertarian paradise.

The current system is in favour of the indirect taxes. Around two-thirds of the centre, state’s tax revenue comes from the indirect tax. Currently, indirect tax stands at 4.69 per cent of the GDP, only marginally lower than the direct tax.

In fact, previously, the share of indirect taxes has reached as high as 90 per cent of the total tax revenue. The problem is that indirect taxes are regressive - a 10 per cent tax on a biscuit pack will hurt a poor person more than a rich person.

Taxes are also an important part of the social contract between the people and the state. Since very few pay taxes, very few put pressure on the government to use the money wisely.

Low taxes create political incentives for the successive governments to borrow money and spend it on populist schemes instead of building an efficient tax system that spurs economic growth.

It also means that the state’s capacity is limited in spending on national security, modern welfare system or public goods, and a persistent fiscal deficit.

It also means that the government is forced to raise money in less efficient ways and govern through regulation.

Another dilemma is that in India, high productivity sectors are taxed while low productivity sectors aren’t. So, valuable resources remain trapped in the latter. Bringing the informal sector into the formal, levelling the playing field, therefore, is also important.

It is also important to point out that mere increase in tax rate doesn’t amount to revenue maximisation. Tax revenue depends on both income and compliance. A very high tax rate not only encourages people to evade and avoid paying taxes, but also dampens the economic activity.

Tax Reform

Various scholars, including India’s chief economic advisers have advised the government to use behavioural sciences to promote tax compliance. Celebrating top tax payers is definitely a step in the right direction.

The government has taken various steps to reform the taxation system in the country.

• Last year, the Corporate Tax rates were reduced from 30 per cent to 22 per cent and for new manufacturing units, the rates were reduced to 15 per cent.

• Dividend distribution tax was abolished.

• Compliance norms for startups have been simplified.

• Every communication of the Income Tax (IT) department is supposed to carry a computer generated unique document identification number (DIN) to ensure transparency and accountability.

• The government is working on a faceless electronic assessment system to minimise human interface

• IT Department has moved forward with the pre-filling of income tax returns to make compliance easier

• IT department has also brought "Vivad se Vishwas Act, 2020" to resolve pending cases. Last year, a similar ‘Sabka Vishwas Scheme’ brought in to reduce litigation in indirect taxes in the year 2019 resulted in settling over 1,89,000 cases.

• Government has also taken several steps to promote digital transactions and electronic modes of payment.

Currently, the payment of taxes is a private matter between IT department and an individual. IT department is a faceless entity. Instead, taxation should become a social activity. Direct communication from prime minister or finance minister will encourage people.

Positive communication from the government to people that their tax money helped build a road in a remote area, personal stories of beneficiaries etc. may also help.