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The Impact of the Government Policies on Direct Tax Collections

1.PNG  Union Minister Arun Jaitley

The first sixty-seven years after Independence from 1947 to 2014 saw a total number of 3.82 crores assesses filing tax returns.  Obviously, in comparison to a total population of almost 1.3 billion, this figure appears highly inadequate.  The total direct tax collection (income tax) in 2013-14 was Rs.6.38 lakh crore.

Prime Minister Modi led NDA Government had a multi-pronged strategy to increase the tax base.  A campaign involving various steps to flush out black-money, including black-money outside the country, was initiated.  The demonetisation led to a lot of people in possession of undeclared cash depositing the same in the banking system.  The source of the money was now questioned.  Almost 18 lakh people were identified who had made deposits disproportionate to their returned incomes.  The use of technology helped the tax department significantly.  Most of the functioning of the Income-tax Department is now online, returns are filed online, queries are addressed online, assessment orders are handled online and refunds are also made online.  Technology is also used for reconciliation purposes in order to detect those who should be filing returns but are non-filers.

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The implementation of the Goods and Services Tax as a single consolidated tax has had a significant impact even on direct taxes.   Those who have disclosed a business turnover for the GST now find it difficult not to disclose their net income for the purposes of income tax.

What would be the combined impact of all these measures on India’s direct taxation base? We had targeted to optimise the base increase without any increase on the tax liability.  India’s tax to GDP ratio in four years increased by almost 1.5%.  On the contrary, a large number of taxpayers in each of the four Budgets of the present Government has benefitted from relief given.  Today a medium-term assessment of the impact of these steps can be made.  In four years, the number of assesses has increased by 64.6%.  The total number of returns filed was 6.86 crores in FY 2017-18.  The number of new assesses who filed returns in FY 2017-18 were 1.06 crore. I hope that the percentage increase when the Government completes its first five years would be significantly higher.  The total income tax collection for the year 2017-18 is Rs.10.02 lakh crore, a four year increase of 57%.  Last year, despite formidable economic challenges, the income tax collection managed to grow by over 18 percent.

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Last year, the impact of the GST on direct tax collection was not visible.  Since GST had been imposed in the middle of the year, it will be more apparent this year.  The first big news for this year is that the advance tax deposit during the first quarter of this year has seen a gross increase of 44% in the personal income tax category and 17% in the corporate tax category.  After repayment of refunds due to some excess tax paid in earlier years, which are usually paid back in the first quarter, the net amount would be somewhat lesser.  But if the same trend continues in the next three quarters, one expects a significant increase in the direct tax collection this year.  The first indication is that the spending is higher, consumption is higher and corporates are seeing increased sales and a greater prospect of profitability.  But increase in the amount of collections in category of personal income tax is also due to more people coming within the tax net.  There is also the impact of the GST visible this year.  This unprecedented taxation growth is a result of the anti-black money measures, use of technology, demonetisation and the GST.  Most of these measures were severely criticized by the Congress Party.  This is just the medium-term impact of some of these measures.  The long-term impact would be significantly higher.  Higher tax collection would enable us to continue with the developmental programmes in the country, not to impose any extra burden on the taxpayers and yet maintain the targeted fiscal deficit.

Money in Swiss-Banks

A news item has appeared today indicating an increase of money by ‘Indians’ in the Swiss banking system.  This has led to misinformed reaction in certain circles raising a query whether the Government’s anti-black money steps have yielded results.

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Switzerland in financial disclosures was always a reluctant state.  Of late it was subjected to a lot of international pressures which favoured disclosures and Switzerland ran the risk of being a ‘non-compliant’ State by the FATF.  It has, therefore, entered into several bilateral treaties for making disclosures to requesting States.  It has amended its domestic laws involving all disclosures and entered into a treaty even with India and real time flow of information with regard to Indians will be made.  The flow of information is starting in January, 2019.  Any illegal depositor knows that it is a matter of months before his name becomes public and he will be subjected to the harsh penal provisions of the Black money law in India.  Assuming this information to be correct, what does past experience show?  When disclosures have been made with regard to ‘Indians’, including in the Panama Papers, certainly some of them have held illegal accounts.  ‘Indian’ money outside the country is of various categories.  Past investigation by CBDT have shown that this includes many held by persons of Indian origin who now hold foreign passport, monies belonging to Non-Resident Indians, as also monies belonging to resident Indians who have made legitimate investments abroad, including transfer of money under the liberalised remittance schemes.  It is only monies kept by resident Indian outside these categories which become actionable.  The first two categories are within the jurisdiction of those countries where these persons are residents and the third category can easily be checked up in India.  If the deposit does not fall in any of these categories, it is per se illegal for which investigations are undertaken, arrests are made and criminal prosecutions are launched.  Switzerland has taken significant efforts to get out of the image of being a tax haven and a non-compliant State.  It is on the verge of making disclosures in real time and, therefore, is no longer an ideal destination for tax evaders.  Those who participate in a public discourse must understand these basic facts before expressing an opinion which may be ill-informed.  To assume that all the deposits are per se tax evaded money or that Switzerland in the matter of illegal deposits is what it was decades ago, is to start on a shaky presumption.

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Taxation reforms on RAPID road

Prakash Chawla* i201751401.jpg

When Prime Minister Narendra Modi addressed officials of Central Board of Direct Taxes (CBDT) and Central Board of Excise Customs (CBEC) in June last year, he gave them an acronym RAPID to follow as they carry out their job of collecting revenue for the national exchequer.

At the conclusion of the ‘Rajaswa Gyan Sangam’  the senior most tax officials were to carry with them the RAPID message in true spirit: Revenue, Accountability, Probity, Information and Digitisation. The crux of the Prime Minister’s message was that the rule of law must be enforced upon those who evade taxes but those paying or willing to pay taxes should be able to fulfill their national obligation with a sense of pride and not fear.

Fear could go only when the taxpayers are empowered with right information, right laws, tools and are dealt with officials with integrity and accountability. While taxation laws have been historically complex and can land honest taxpayers in a maze of rules and sub-rules, this government has been trying to make things easier for the individuals, trade and industry, willing to pay their dues happily.  It must be said, however, that many a time the tax laws are difficult to change, because they are embroiled in litigation with the courts scrutinizing every bit of rules. For instance, the much debated retrospective taxation was considered to be one of the reasons for the policy paralysis during the previous regime. Retrograde taxes from retrospective effect have been given go-bye, even though the suits pending in courts have to be disposed of by the judiciary.

To make life easier for the taxpayers, the Finance Ministry has been working continuously to reduce the burden of compliance. For instance in the previous budget, the Finance Minister Arun Jaitley announced restricting the scope of domestic transfer pricing which was brought in the Finance Act of 2012 as an anti-avoidance measure.

Similarly, the threshold for audit of business entities which opt for presumptive income scheme has been raised from  Rs `1 crore to Rs 2 crore.  The limit for maintenance of books for individuals and HUF is being increased from turnover of Rs 10 lakhs to Rs 25 lakhs. For professionals the presumptive tax limit is applicable up to Rs 50 lakh per annum.  These  provisions obviate the need for small businesses  to maintain the books of accounts .

Several user -friendly provisions have been incorporated in the Income Tax Act to provide ease of doing business to the Foreign Portfolio Investors with regard to transfer of shares or stake  interest.

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But the biggest and most influential tax reform is coming about in the form of the Goods and Services Tax (GST) in July or latest by September this year. Though the entire political spectrum deserves to be complimented for coming round and finally supporting the game-changing Constitutional Amendment in Parliament and then passage of the enabling legislations, the steadfast approach of the Prime Minister made it happen with a lot of conviction. Even as full swing preparations are underway for the GST roll out, the Prime Minister himself is overseeing the progress and the readiness of the Centre, states and the business establishments for the indirect tax that would redefine the way, businesses and consumers pay taxes on goods and services.

Unlike the earlier dispensation which was origin or manufacture based taxation, the GST would be destination or consumer-based levy that would involve subsuming a slew of taxes and seamless system of payments and credits. Eventually, the consumers would pay a single tax, instead of being subjected to host of imposts like excise, additional excise, Value Added Tax or Sales Tax, service tax and octroi.

Different estimates suggest that the GST should result in addition to the country’s Gross Domestic Product, at least by 1-2 per cent as several of the trade and industry links which managed to stay outside the tax net would have to adopt to the new taxation regime for their own interest and operational efficiencies. The concerns over the impact of GST on prices may not hold good; on the contrary, in the medium to long term, prices should ease with credits being available to the trade channels across the entire value chain. Moreover, the transaction costs resulting from delay in cargo movement at the inter-state borders would bring down the costs for the consumers.

The trade and industry is being geared up for the smooth functioning of the GST with the entire machinery of the CBDT, CBEC along with the state governments being deployed into training the personnel and interacting with the trade. For the initial stages, there has been a demand from the business bodies about some amnesty if there are un-intentional lapses resulting from the migration to the Goods and Services Tax Net (GSTN) based system. Perhaps, it could be the GST Council which should take a call on the issue as there is a merit in the contention. After all, stakes are too high for making GST a success and showpiece of India’s tax reforms.

Even the global rating agencies and the multilateral organisations would be keeping a close watch on the implementation of the GST. Its smooth roll out should definitely push India up, at least by a few notches, on the World Bank Index of Ease of Doing Business. Taxation is one of the key barometers which work as a catalyst for investment from the domestic and global sources. For now, India has got it right.

*Prakash Chawla is a senior journalist and commentator. He mostly writes on political-economy and global economic issues.

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