Tax administration, heal thyself

Tax rate increases are in the air, especially since all of us have read about the fiscal cliff in the US, the 99 per cent vs 1 per cent fashion, President Hollande of France (an economy closest to us in its non-economic and Luddite views) proposing prohibitive tax rates on the rich, etc.

C. Rangarajan, advisor to the prime minister, stated, appropriately on Financial Inclusion day, that "one need not disturb the structure of income tax system as it is now. But add a surcharge for income above [a] particular level. I believe as we go along, we need to raise more revenues and the people with larger incomes must be willing to contribute more".

Note the populist appeal to the super-rich. They should be willing or else, off with their heads (income). As discussed in my earlier article, Taxing the rich and other fantasies (IE, January 23), there is precious little evidence to support Rangarajan's recommendation. What the data do suggest, as documented extensively below, is that the reason tax revenue is considerably below potential is because the middle income group, those earning between Rs 5 to Rs 10 lakh, is quite "unwilling" to pay taxes, even at an average tax rate of 10 per cent! And that the most "willing" are the super-rich, those earning above Rs 20 lakh a year. The raise tax rates recommendation should be junked, especially since stable tax rates have generated "good" tax revenue and allowed compliance to increase more than threefold from the abysmally low levels which prevailed prior to the 1997-98 budget.

Until 2005-06, India, via CAG reports on the ministry of finance, had access to data, some data, on the distribution of income and taxation. After that whoosh all the information stopped. Now the reports only reveal the total number of taxpayers in the economy, about 3.24 crore, out of which about 1 crore file tax returns but don't pay any tax because their incomes are below Rs 1.8 lakh.

... contd.

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