How under-reporting (of income) is a major concern for mobilization of resources despite growing tax collection?

The Central Board of Direct Taxes has released the latest data on income tax collections.

Key findings from the CBDT report

• The number of tax returns filed has increased to 6.85 crore in FY 2017-18. This is an 80% growth since FY 2013-14.
• The number of taxpayers reporting income greater than Rs1 crore has reached 1,40,139 which is an increase of 60% between assessment year (AY) 2014-15 and 2017-18.
• But the tax collections have not shown commensurate increase similar to increase in number of those filing returns.
• Tax collections have grown at a decent compound rate of about 13% per annum.
• The average income reported by rich Indians i.e. those in the highest tax slab has decreased.
• The share of the richest top 1% in the total tax collected has decreased by almost four percentage points. Similar is the case with the top 5% income earners.
• Relatively low income groups are paying a larger proportion of the tax collected.

Why under-reporting is a cause of concern?

• The average income reported by the low tax slabs has increased but this is not the case with the high income groups.
• Number of high-income individuals (HIIs) grossly under-report their income.
• The Global Wealth Report 2018 predicts that at least 3,400 Indians have an annual income of more than Rs 50 crore each but only 179 of them reported this level of income to the taxman in AY 2017-18.
• The Global Wealth Report 2018 predicts more than 1,500 Indians with an expected annual income of more than Rs 100 crore each but only 61 reported to the taxman.
• The share of reported non-salary income in the gross income of individuals has declined over the years, to 43% in 2017-18 from 48% in AY 2012-13. This is a strong case of under reporting because if it has to be true there must have been a stagnation in the income of lawyers, doctors, accountants and those running private educational institutes.
• A mere 7% of corporates reported profit before tax of more than Rs 1 crore. This is also a cause of under-reporting.
• There were 1.17 crore filers under the Presumptive Taxation Scheme which aimed to regularize the black money.

The implementation of the GST will help stem tax evasion by semi-formal and mid-size companies by formalising their transactions. But it cannot address the main problem of tax evasion and avoidance by high income individuals and big corporates.