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On the 161st Income Tax Day, FM Nirmala Sitharaman singled out individual taxpayers for praise. She lauded honest taxpayers for their contribution to nation building and said that it needs to be recognised. Indeed, they have been the bulwark of the direct tax system. Last fiscal, when corporate tax collections collapsed, the personal income tax collection level held firm. At Rs 4.71 lakh crore it exceeded corporate tax collections, the first time this century. Honest taxpayers will be best rewarded if those evading taxes are caught and made to pay their fair share.
India has a personal income tax base heavily dependent on the salaried class. Last year, 65.4 million income tax returns were filed, less than 10% of India’s adult population. Not all who file returns pay income tax. Evidence suggests that income tax data is not in sync with the pattern of consumption. For example, in 2018-19, only 5.5 million individuals declared an income of over Rs 10 lakh. In the same year, 3.47 million new cars were sold. Other consumption data tell the same tale. Salaried individuals bear a disproportionate burden of nation building.
I-T authorities make plenty of noises about catching well-heeled non-salaried individuals in the tax net. But results have been disappointing. Under-declaration of income and over-declaration of expenses are widespread and, somehow, I-T seems unable to consistently track hidden personal income via consumption expenditure. Now that large cash transactions are supposedly considerably fewer than before, this seems even more surprising.
The bigger reform is to scrap an income tax code that is a patchwork of incremental changes and lacks overall coherence. Almost two years ago, a task force appointed by GoI submitted its report on a new code to replace the existing law. That needs to be unveiled and acted upon soon.
This piece appeared as an editorial opinion in the print edition of The Times of India.