Income tax evasion: How India’s crorepatis dodge tax system

Few would contest that India’s tax system leaves a lot to be desired when it comes to checking evasion, but lo and behold: there could be some 68,000 individuals in the country earning above Rs 5 crore a year when the official I-T returns show only 5,000 people with such income. Similarly, the number of people with taxable income between Rs 1 crore and Rs 5 crore could actually be 10 times what the I-T database shows and in the Rs 50 lakh-Rs 1 crore income range, there could be 11 people tucking themselves away from the taxman’s gaze for every individual reporting such income.

FE has juxtaposed the I-T data for FY16 with the Household Survey on India’s Citizen Environment & Consumer Economy (ICE 360° Survey), conducted by the People Research on India’s Consumer Economy (PRICE) for the reference period, April 2015 to March 2016, to bring to light these astounding facts.

While the PRICE survey (it covered 61,000 households across 24 states) revealed the income levels of households and family sizes, FE relied on it to estimate the number of earners in various income ranges. The estimates are approximations, but indeed capture the big picture.

The findings of the survey bear testimony to the fact that India’s cash economy was unacceptably large at the time of demonetisation (announced on November 6, 2016). It is another matter that the tax evaders have largely been able to escape its teeth and insulate themselves from the subsequent crackdown by the taxman.

There are many things that enable the informal economy consisting largely of small businesses and professional networks to remain out of the tax net or under-report income. A usual way is over-reporting of (untaxed) ‘agriculture income’ which is rampant not just in rural areas but in the areas close to big cities, analysts said.

Small firms do pay big amounts in cash to key functionaries. The linking of PAN to bank accounts, restrictions on cash withdrawals/deposits (with thresholds, mandatory quoting of PAN etc) and the various steps being taken by the I-T department like the database of high-value transactions have helped curb tax evasion to some extent. But these don’t suffice to address the problem in a meaningful manner.

Addressing the nation on the 71st Independence Day, Prime Minister Narendra Modi had said Rs 1.75 lakh crore deposits in banks after note ban as well as 18 lakh people with income beyond known means were under scrutiny. However, so far only about `6,600 crore has been recovered in taxes from the exercise.

Large-scale tax evasion by sections of the society puts a big burden on the honest taxpayers, especially the salaried. However, with the taxman not being able to go against the evaders and bring the big fish among them under the tax net, the focus is on those who actually pay large amounts as taxes. The scrutiny of tax returns is often of those people whose returns show high taxable incomes, while the evaders go scot-free.

Taxman’s inability to catch evaders has also led to highest tax rate kicking in at a relatively modest income level. As reported by FE recently, it was in Budget FY13 that the income tax slab for the marginal rate of 30% was moved from Rs 8 lakh to Rs 10 lakh. Over the six years since then, the value of money has eroded considerably, but the threshold for the highest tax bracket remained unchanged, causing sections of the taxpayers in the top slab to increasingly feel the tax pinch.

[“source=financialexpress”]