Wider tax net

But immunity schemes yield insignificant benefits

The government has stated that its demonetisation move has helped it bring 9.1 million individuals under the tax net. This is a significant achievement as the increase is as much as 25 per cent of the 37 million individuals, who had filed income-tax (I-T) returns in 2015-16. In addition, the government’s search and survey actions in the wake of demonetisation have led to the detection of undisclosed income of Rs 23,144 crore. Already, the government has identified 1.8 million people, whose cash transactions did not appear to be in line with their tax profile. Almost a million such individuals have submitted their online responses without having to visit the income-tax offices, indicating how the whole exercise has been undertaken while using technology to reduce human interface and scope for corruption as well as harassment. Taken together with a 22 per cent surge in e-filing of returns and a doubling of the daily allotment of Permanent Account Numbers or PAN to taxpayers to 200,000, it would appear that the country is witnessing a marked improvement in tax coverage and compliance with some tangible results in cleaning up the tax system.   

However, these achievements need to be evaluated in the context of how the I-T machinery has performed in the last few years. The latest data on the number of individuals brought under the tax net in earlier years pertain to 2012-13, when that number was put at 4.8 million, compared to 3.6 million individuals brought under the tax net in 2011-12. Tax experts point out that the actual gain in the number of new persons under the tax net would be revealed when the relevant figures for three years till 2015-16 are available. Similarly, e-filing of tax returns has been on the rise, but its annual growth has understandably slowed down in the last couple of years — from 27 per cent in 2015-16 to 22 per cent in 2016-17. 

It must also be acknowledged that the government’s record in cleaning up the system by giving taxpayers an opportunity to declare their undisclosed income by paying taxes on that at a slightly higher rate has not yielded much success. Two, such schemes were launched in the last one year. The first such scheme that ended last September led to the reporting of undisclosed income of only Rs 55,000 crore, on which the tax at the rate of 45 per cent had to be paid in three instalments. The second scheme has yielded only Rs 4,600 crore, sending out a clear message that tax immunity schemes have failed to live up to their promise of unearthing unaccounted money. 

The government would do well to recognise also the moral hazard that such immunity schemes cause apart from discouraging compliance among those who hope that similar bailouts would be available to them in future as well. The message that comes out loud and clear from these efforts is that while a lot has been achieved in bringing more individuals under the tax net and making the process of compliance easier, the benefits from tax immunity schemes are clearly insignificant. This calls for continued focus on deeper tax reforms and greater use of digital technology to track transactions.