about us
  areas of expertise
  our projects
  ideas & resources


  Index of Articles          Index of Perspectives            Next Article


Where are the Missing Taxpayers?

Omkar Goswami


Anybody with economic sense will tell us that India cannot finance its huge infrastructure investments if it continues having the kind of fiscal deficits that it does. We will also be told that reducing the deficit not only requires curtailing inessential government expenditure but also raising tax revenues. It will also be said that India has one of the worst direct tax to GDP ratios in the world.


All of this is true, which is what maddens an honest, nationalist taxpayer. To begin with, why in the 21st century should agriculture be outside the ambit of income tax? It shouldn’t  matter what you do; you could be a businessman, a trapeze artist or a private tutor; so long as you earn income above the minimum threshold, you must pay taxes. Yet, the Seventh Schedule of the Constitution categorically states that it is the business of the central government to collect “taxes on income other than agricultural income”. There was no economic justification for this even in 1950. That India had many, many poor farmers and less prosperous agriculture then does not alter the tenet that if you were a rich farmer in 1950, then you ought to have been paying central income taxes, no differently from similarly well off person working elsewhere. Why in 2005 must we be forced to obey an archaic constitutional provision that was adopted more than fifty-five years ago — a hoary statute that is so economically and socially wrong-headed?


So, thanks to some woolly-headed sons-of-the-soil thinking in 1950, 22 per cent of India’s GDP avoids the central government’s income tax net. And since no politician anywhere will commit hara kiri, you can rest assured that there will never be an amendment to this  constitutional provision.


Consequently, the pressure falls upon the rest of us. Even here, the salaried and the honest bear the brunt, while those engaged in small and medium businesses, trade and unorganised professions laugh their way to many bank accounts.


In 2003-04, only 28.8 million people filed their income tax returns. Of these, a mere 1.05 lakh declared a taxable income of Rs.10 lakh and above. From this follows a palpably wrong conclusion that only 0.36 per cent of the India’s non-agricultural income earners have a taxable income of Rs.10 lakh or more.


That’s laughable. Here’s a rough idea of how many slip the net. There are 60 million urban households in India. If you look at the number of ostentatiously weddings, you would agree that at the very least 1 per cent of these households earn well over Rs.10 lakh per year. That translates to 6 lakh people which, I assure you, is a serious underestimate. In other words, our income tax department is catching one out of six of those who have income over Rs.10 lakh.


When Mr. Chidambaram in his previous stint announced the Voluntary Disclosure of Income Scheme, almost 6 lakh people came out of the woodwork to declare taxable income in excess of Rs.10 lakh. Since then, five lakh of these chaps have returned to their cracks and crevices.


Its is so very easy. If you ran a smallish business or was a professional who got every payment by cheque, you could still evade taxes by having multiple bank accounts. There is nothing in the income tax department’s IT system that can track all your bank accounts through your PAN number, and then start serious scrutinising. Here is another example. Delhi is rife with dedicated yoga teachers who move from home to home helping rich unfit people flex their bodies. On average, they service 30 clients at Rs.3,500 per month. That’s Rs.12.6 lakh, all paid in cash. How many of them file income tax returns? And if so, of how much? Private tutors, doctors, traders, builders, property brokers — you name them and they grossly under-report.


Now guess what happens to the silly fellows like me who get their statements compulsorily audited by chartered accountants and belong to 1.05 lakh who declare taxable income of Rs.10 lakh or more? Our returns get scrutinised way more often than those who declare below Rs.10 lakh. Clearly, that must be the world’s best reward for honesty. Sometimes, I envy yoga gurus!           


Published: Business World, December 2005


                 Index of Articles          Index of Perspectives            Next Article