February 11, 2017 2:56 am JST

Modi govt. aims to widen India's abysmally low tax net

Budgetary proposals focus on curbing "black" money flow

KIRAN SHARMA, Nikkei staff writer

India introduced a 2,000-rupee note after the demonetization of high-value banknotes in November 2016. (Photo by Kiran Sharma)

NEW DELHI -- Prime Minister Narendra Modi's government, which has launched a massive war against "black" money, wants more and more Indians to come clean on their earnings and pay taxes.

Clamping down on untaxed money is one of the top priorities of the Indian government, reflected in its budgetary proposals for the financial year beginning April. It is also seeking to enlarge its taxation base, while ensuring that the country's lower income groups get some relief, while the rich pay more.

According to the latest economic survey from the finance ministry, India has only seven taxpayers for every 100 voters aged 18 and above. Over 800 million people in the country of 1.3 billion are eligible to vote.

In his Feb. 1 budget, Finance Minister Arun Jaitley proposed to reduce to 5% from 10% the existing rate of taxation for individuals earning 250,000-500,000 rupees ($3,740-$7,480) annually, and has also announced a simplification of the cumbersome associated paperwork. In India, those earning up to 250,000 rupees are exempted from tax.

The government hopes the tax reduction will lead to an increasing number of people declaring their earnings.

Under the proposals, all other categories of tax payers will get a tax-free benefit of 12,500 rupees per person.

Additionally, the government will levy a surcharge of 10% of tax on those whose annual taxable income is between 5 million rupees and 10 million rupees, while the existing surcharge of 15% on the super rich, or those earning more than 10 million rupees, will continue.

According to government data, more than 70% of those declaring income above 500,000 rupees a year -- 5.6 million out of 7.6 million people -- come from India's working or salaried class. Surprisingly, only two million individuals in this bracket are industrialists and other self-employed people such as doctors, lawyers and architects, who should have made up the main taxation base.

Tax evasion leads to the accumulation of black money, against which the Modi government has taken several steps. Its boldest move so far against illicit cash has been the demonetization of large denomination banknotes of 500 and 1,000 rupees on Nov. 8. The note ban sucked some 15.4 trillion rupees, or 86% of the cash in circulation, from the economy. Although effective, it was highly disruptive as an estimated two-thirds of the country's gross domestic product -- about 90 trillion rupees -- is cash-based.

The predominance of cash in the country has facilitated rampant corruption and the hoarding of untaxed money, which makes up a large part of real estate and jewelry transactions and also political campaign funding.

"For several decades, tax evasion for many has become a way of life. This compromises the larger public interest and creates unjust enrichment in favor of the tax evader, to the detriment of the poor and deprived," Jaitley said. "This has bred a parallel economy which is unacceptable for an inclusive society."

One of the taxation proposals targets anonymous cash donations to political parties, which will be capped at 2,000 rupees, a steep reduction from the current 20,000 rupees cap. "This reform will bring about greater transparency and accountability in political funding, while preventing future generation of black money," Jaitley said.

In another step seen as targeting black money and encouraging digital payments, he announced that no cash transactions exceeding 300,000 rupees will be allowed.

Separately, Jaitley said the corporate income tax for small firms with annual turnover of up to 500 million rupees would be reduced from 30% to 25%, benefiting 96% of the 667,000 such companies already in existence. "This [lower taxation] will make our MSME [micro, small and medium enterprises] sector more competitive as compared to large companies," he said.

Tax-evading nation

While presenting the annual budget, Jaitley noted that India is largely "a tax non-compliant society," where only 2.4 million people said they earned above 1 million rupees, while just 172,000 individuals declared income of more than 5 million rupees in the financial year ending March 2016.

However, these figures do not match the consumption pattern of Asian's third largest economy. "We can contrast this with the fact that in the last five years, more than 12.5 million cars have been sold, and [the] number of Indian citizens who flew abroad, either for business or tourism, is 20 million in the year 2015," the finance minister said.

After the Nov. 8 demonetization, a preliminary analysis of data received related to cash deposits made by people in old currency presents "a revealing picture," Jaitley said.

Indians were given until Dec. 30 to deposit the banned notes into their bank accounts. Authorities also warned that deposits exceeding 250,000 rupees and not matching the account holder's declared earnings could lead to their being questioned by tax officials.

Between Nov. 8 and Dec. 30, deposits of between 200,000 rupees and 8 million rupees were made in about 10.9 million bank accounts, with an average deposit size of 503,000 rupees. Deposits of more than 8 million rupees were made in 148,000 accounts with an average deposit size of 33.1 million rupees, the data showed.

"This data mining will help us immensely in expanding the tax net as well as increasing the revenues, which was one of the objectives of demonetization," the finance minister said.

However, demonetization appears to be curbing India's economic growth for the current fiscal year ending in March. GDP growth in the ongoing financial year is expected to be lower than 7%, according to the pre-budget economic survey. Advance estimates released by the Central Statistics Office in January had placed the growth rate at 7.1%, against 7.6% in the year ended March 2016. 

On Feb. 8, the Reserve Bank of India, the country's central bank, also revised downward to 6.9% from an earlier estimate of 7.1% the growth forecast for the current financial year, though it has projected a 7.4% rate for the next year beginning in April.

On Feb. 7, Modi defended the demonetization policy in parliament, saying the timing for the move was right as the country's economy was strong. "Had the economy been weak, we could not have carried out this exercise successfully."

 

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