Back‘Misleading’ statistics spell trouble for honest taxpayers
Misleading statistics are often doled out by revenue authorities just to support their case
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The recent statement of the revenue secretary asking taxpayers to pay correct taxes by way of advance tax or face action and statistics that only 1.46 million taxpayers had filed their returns for the year ended March 2012 disclosing taxable income exceeding ₹ 10 lakh, while 1.6 million persons made credit card payments exceeding ₹ 2 lakh and 1.2 million persons purchased or sold house property valued at ₹ 30 lakh or more, gives the impression that we are a nation of tax evaders. Is this correct? It also gives rise to some interesting questions about the use of statistics and the functioning of the income-tax department.
Unrealistic tax collection targets
Certainly, no one can quarrel with the statement that taxpayers must and should pay their rightful taxes. But would payment of rightful taxes meet tax collection targets? If tax targets are fixed by the tax department anticipating growth in tax collection at 30%, while the economy is growing at less than 6%, are all taxpayers expected to pay 25-30% more taxes, though their income may be stagnant or be even lower than that in the earlier year? Unfortunately, pressure put on tax officials to meet unrealistic tax collection targets results in corresponding pressure being put on genuine and honest taxpayers to pay more taxes than rightfully due, or holding up of refunds. This results in further pressure on profitability of businesses.
It is high time that instead of absolute tax collection targets being fixed on an arbitrary basis, minimization of the tax gap should be targeted. The tax gap is the difference between the potential tax collection considering macroeconomic factors such as gross domestic product or GDP and the actual collection. Parthasarathi Shome, recently appointed as an advisor to the finance minister, in his book, Tax Shastra, has rightly pointed out that minimization of tax gap is what most enlightened tax administrations target worldwide. One hopes that India’s tax administration will also now become enlightened and do away with unrealistic tax collection targets.
Misleading statistics?
Let us consider some statistics cited in the revenue secretary’s statement.
Credit cards: It is common knowledge that credit cards are used for business expense purposes as well, not just for personal expenses. Therefore, a high level of credit card spend by a person may not necessarily signify a high level of income—on the contrary, it may indicate high level of business expenditure, meaning a lower taxable income.
Property: Property purchases are often made by taking housing loans, or out of savings accumulated over the years. To expect a person to pay taxes on an income of above ₹ 10 lakh just because he has bought a house for more than ₹ 30 lakh betrays a lack of understanding of the ground reality.
Mutual funds and bonds: Investment in mutual funds exceeding ₹ 2 lakh and bonds exceeding ₹ 5 lakh cannot be seen in absolute terms—it has to be seen net of redemptions. Fresh investments may have been made out of redemption of earlier investments and not necessarily out of current income.
The statistics that should matter
What perhaps needs to be targeted is the 3.4 million persons making large cash deposits exceeding ₹ 10 lakh in a year. Of course, here too, one has to understand the nature of the business. Most retailers and businesses such as restaurants deposit their daily cash collections in their bank accounts. But the gross sales, deposited in the bank in cash or received by credit card or cheque, is not taxable income; it is the net profit which is taxable. Every retail business has expenses, such as cost of goods sold, labour costs, rent, electricity and overheads, among others, which are deductible for tax purposes. The net profit, in most of such businesses would range from 10% to 20% of gross sales.
One more aspect that has been glossed over is that almost 45% of the tax collection is received by tax deduction at source (TDS) and not by way of advance tax. Many taxpayers, particularly salaried employees, have almost the entire tax deducted at source from their income, but do not file tax returns under the wrong impression that they are not required to do so since their tax has already been paid. How many such taxpayers are not included in the statistics? What is the trend in the TDS collection figure this year as compared with the earlier year? Does the advance tax trend match that trend? If so, is the threat held out to taxpayers merited?
The true picture
So far as some of the statistics are concerned, there is a clear difference between taxable income and real income. Dividends are tax-free in the hands of shareholders as companies pay a dividend distribution tax. Similarly, partners of a partnership firm do not pay tax on their share of profits, on which taxes are paid by the firm (many large professional firms are partnerships). Many high net worth individuals (HNIs) invest in shares or units of equity mutual funds (MFs), where not only the dividend, but even long-term capital gains is exempt. There are also bonds with tax-free income. There are, therefore, many individuals whose income is in crores, but the major part of whose income is notionally exempt as tax is payable by another entity, such as the partnership firm or the company. Then to say that such persons are showing income of a low amount, though it is because the tax laws have chosen to tax the person in such a manner, is extremely unfair. What needs to be considered is the total taxable income and the exempt income (which is also disclosed in the tax return) to give a realistic picture. Can we ever expect such a true picture?
Last word
Unfortunately, misleading statistics are often doled out by revenue authorities just to support their case. For instance, a few years ago, the National Tax Tribunal was mooted to reduce the level of tax arrears, which was then at about ₹ 2 trillion. This gave the impression that such a large amount was not recovered because of pending litigation. What was left unsaid was that more than half this amount was irrecoverable being due from persons involved in scams, such as Harshad Mehta and Ketan Parekh. The truth came out only earlier this month when the finance ministry disclosed to a parliamentary committee that it had written off an amount of around ₹ 1.3 trillion (mainly due from such persons) out of total tax arrears of around ₹ 2.5 trillion. One wishes that all citizens are given a true picture.
Also, while a large amount of information on transactions is being collected by the tax authorities, one hears that there is hardly any meaningful analysis of such data for lack of personnel. It is high time that a sincere effort is made to evolve a proper strategy to net real tax evaders and reduce the unwarranted pressure being put on honest taxpayers.
Gautam Nayak is a chartered accountant.
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