Budget 2022: Here's how FM Nirmala Sitharaman can increase the tax kitty in the Union Budget

By Gopal Goswami & CA Mukesh Kabra

The tax-to-GDP ratio measures the quantum of a country’s tax revenue in relation to its GDP. A greater tax-to-GDP ratio indicates, the government may cast a wider fiscal net. It lessens government’s reliance on borrowings, but in contradiction to this premise, Govt of India’s outstanding debt exceeded 100 lakh crore mark for the first time at the end of June 2020. As stated in the quarterly report, total liabilities grew to 101.3 lakh crore from 94.6 lakh crore at the end of March.

India’s gross tax-to-GDP ratio is about 11%, much below the OECD average of around 34%.

Despite the government’s efforts, tax-to-DGP ratio has stayed steady between 10-11% for the last 5-6 years. Our direct taxes account for around 55% of overall tax collection, remaining 45% account to indirect taxes. Government focused on increasing the number of taxpayers in direct tax and instituting GST in indirect tax to increase the collection.

Government’s efforts have not yielded the intended outcome in terms of direct-indirect tax collections. Though the number of income tax return assessments doubled from 3.3 crore to 6.5 crore, income tax collection climbed Rs6.38 to 11.50 crore from FY 2013-14 to FY 2018-19, direct tax to GDP ratio increased minuscule from 5.62 to 5.98 percent over the same period. Collection of indirect taxes, particularly GST, is substantially below the planned collection.

It implies that merely increasing the number of taxpayers is not working to enhance the tax-to-GDP ratio. According to the Income Tax website, the total number of taxpayers is around 4.5 crore till December 2021. India is mostly an agrarian economy; agricultural income is tax-free. 40% of the population is still considered impoverished. A large proportion is under the age of 18, students, and old citizens, none of these contribute to the exchequer. A considerable portion of the population is excluded from the tax net.

As we know, agriculture and related products account for a large portion of GDP, but no contribution in tax kitty, whereas this is not the case in other OCED countries. Comparing tax GDP ratios with other OCED countries is a faulty approach. 

However, tax GDP ratios in India can be increased through various out-of-the-box approaches. Here are a few unconventional approaches:

Social Security benefits for Taxpayers: Though the middle class is the biggest contributor of direct taxes other than corporations, they are unhappy that there is no reciprocity from the government to appreciate them.  There are many SSS for the EWS and lower middle class such as Atal Pension Yojana, PM Jan Suraksha Beema, but there is no incentive for the middle or upper class of society, which can benefit them in their post retirement age. This will also address social abuse, generally elders encounter in old-age due to lack of financial resources.

For example, there may be a scheme where a certain portion of the tax paid can be assigned for post-retirement endowment as pension. It will not be a burden to the government since more people will pay taxes in expectation of receiving a portion of the money back. It can bring more people under the tax net hence increasing the tax collection. This can be a potential game changer since most people are law-abiding citizens, and such an extraordinary initiative will act as a booster tonic.

Rewarding and recognising honest and high-tax payers: there is no scheme to appreciate the big taxpayer other than “Certificate of appreciation” received by e-mail. The appreciation must be made public through various mediums of propaganda so that a public image can be built to encourage other taxpayers too. 

•  These high tax paying individuals should be felicitated in the government’s public outreach programs. A preferential gesture at Train reservation, airport checking, Toll booth of highways etc can encourage the honest high tax payer.
• Public places of the city can be named to a high tax payer for consecutive years, as they are the contributors of the money spent on public infrastructure development.
• Highest tax payer can be a state guest with the Governor or state Chief Minister or other dignitaries for a day.
• High-income taxpayers can be nominated as members of different central committees or local government bodies.
• There may be a hundred ways to felicitate the honest tax payer to be rewarded, published so that others are too persuaded to pay taxes honestly.

Surprising gift/cash back for retail customers: Despite several attempts and procedures to correct the system, GST collection is falling short of expectations. Faulty software, website crashing, is also undermining the ease of business notion. As we all know, GST evasion begins at the bottom of society. It is common knowledge that evasion begins with the retailer, in the absence of a mechanism to keep a check on sales, various retailers evade their sales and also purchase corresponding material from wholesalers off the books, and this chain is escalated up to manufacture, resulting in massive GST evasion.

GST is a consumption-based tax system in which high tax revenue accrues to states with high consumption. For a surprise the estimated Per Capita GST Collection of Bihar for the year 2019-20 is less than Rs 100/- per month, compared to around Rs 600/- for the national average. It has been observed that the majority of shops have not yet obtained GST registration and have sales lower than the threshold amount required for registration. In India, the average GST registered businessman earns roughly 1.30 crore, which appears to be relatively low.

Government should create a portal or app for retail consumers to feed their purchase bills to the portal through the app. Random retail invoices may be cross-checked with the retailer’s sales. Retail consumers are encouraged to pay via banking channels, and cash back schemes to be introduced on a monthly basis. As once payment is made through a banking channel, it is quite difficult for a person to avoid such purchases from the books.

Accountability should be fixed: The government introduced various schemes for a transparent taxation system, faceless assessment, appeals etc. It has an honest approach to abolish the terrorist image of the taxman.  Government looks committed to a transparent taxation system, but high-pitched assessment in such schemes is still a nightmare of a tax-payer. Such systems will produce the intended effects if responsibility is likewise tied to the authorities. For example, promotion should be tied to the number of cases that are upheld at the appellate level. This will increase the system’s legitimacy, and absorbing additions at the assessment and appellate levels will be avoided.

There might be a variety of additional out-of-the-box techniques that will boost tax compliance. If these are executed, India’s tax-to-GDP ratio will rise to an acceptable level. An effort to lower the tax slab will also be a good step. In the last two years over five lakh high net worth Indians has embraced foreign nationality due to the complex and hounding tax system. That is a direct loss to the exchequer. It’s simple, lower the tax slab, higher the tax collections and wider the tax net. It’s up to our decision makers which side they want to see the country.

The authors – Gopal Goswami is Research Scholar, NIT Surat and Mukesh Kabra is a Surat-based Chartered Accountant practicing from 20 years. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)