The proposed changes include a revisit of income tax and corporate tax regimes. It also favours restructuring of tax slabs. Though it may be too early for celebration for low and middle income groups under the current slabs, the government should be able to implement the new direct tax code around the next budget in 2019. The committee was given six months to submit its report. However, the final report may not be ready before June, next year. This is not the first time that the government is thinking of replacing the decades old direct tax structure that followed the introduction of the country’s first economic reform in 1992. The Congress-led UPA government too had set up a committee to prepare a direct tax code. A draft was ready. But, it was not implemented. The UPA’s draft direct taxes code was said to be less progressive.

Roughly, there are six areas of direct taxes. The government levies and collects them directly on and from an entity or individual. These taxes are: income tax, corporate tax, capital gains tax, wealth tax, securities transaction tax and perquisite tax. Of them, income tax and corporate tax raise the biggest chunk of revenues under the direct tax system for the exchequer. Presenting the current financial year’s budget, Finance Minister Arun Jaitley made a revealing data on the subject indicating that India’s direct tax collection is not commensurate with the income and consumption pattern of the economy serving a population of around 130 crore. In 2015-16, only 3.7 crore individuals filed tax returns. Of them, 99 lakh showed income below the exemption limit of Rs. 2.5 lakh per annum; 1.95 crore showed income between Rs. 2.5 lakh and Rs. 5 lakh; 52 lakh showed income between Rs.5 lakh and Rs.10 lakh; and only 24 lakh people declared income above Rs.10 lakh. The number of people showing income above Rs.50 lakh was only 1.72 lakh. Few will disagree with Jaitley that “direct tax collection is not commensurate with the income and consumption”. For instance, in the last five years, more than 1.25 crore cars were sold. Over two crore Indians flew abroad in 2015 alone, either for business or tourism. India’s tax to GDP ratio is very low, and the proportion of direct tax to indirect tax is not optimal from the social justice viewpoint.

Similarly, as against 5.6 crore informal sector individual enterprises and firms engaged in small business, the number of returns filed was only 1.81 crore. Out of the 13.94 lakh registered companies till March 31, 2014, only 5.97 lakh companies filed returns for Assessment Year 2016-17. Of them, as many as 2.76 lakh firms showed losses or zero income. About 2.85 lakh companies showed profit-before-tax (PBT) of less than Rs.1 crore. Some 28,667 showed profit between Rs. 1 crore and Rs. 10 crore, and only 7,781 companies had PBT of more than Rs. 10 crore. Interestingly, after demonetisation, the preliminary analysis of the data received in respect of deposits made by people in old currency presents another revealing picture. “During the period November 8 to December 30, 2016, deposits between Rs. 2 lakh and Rs.80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs. 5.03 lakh. Deposits of more than Rs. 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs. 3.31 crore. This data mining will help us immensely expanding the tax net as well as increasing the revenues, which was one of the objectives of demonetisation,” the finance minister had said. The provisional figures of direct tax mop-up upto November, 2017, put total net collections at Rs.4.8 lakh crore, 14.4 per cent higher than that in the corresponding period, last year. The Net Direct Tax collections represented 49 per cent of the total budget estimates of direct taxes for 2017-18 (Rs. 9.8 lakh crore). The gross collections (before adjusting for refunds) have increased by nearly 11 per cent to Rs.5.82 lakh crore. Refunds amounted to Rs.1.02 lakh crore during April-November, 2017.

The current individual expenditure scenario does not connect with the penchant for payment of direct taxes. Both tax evaders and tax avoiders need to be incentivised or lured to pay taxes — be they as income tax, corporate tax, capital gains tax, securities transaction tax, or wealth tax. And, wilful defaulters need to be identified, booked and penalised. First of all, the existing direct tax rates need to be progressively reduced to broaden the tax base as public expenditure can’t be compromised. It’s an established fact that lower tax rates and liberal tax slabs mean more compliance, resulting in a so-called virtuous cycle, meaning more people pay taxes. The current levels of taxes are considered high by both individuals and corporates. With the US and UK moving towards 20 per cent tax on companies, the clamour for a reduction in India is also rising. Industry bodies like CII and Ficci had recently pitched for substantial reduction of corporate tax from the present 35 per cent to a flat rate of 18-20 per cent. The new direct tax code must make it attractive to tax payers at all levels while focussing on enlargement of the tax base, tax compliance and tax collection. The present revenue from direct taxes as a portion of India’s $2.5-trillion-plus GDP is too low. (IPA Service)