A Fact Check about Income Tax Base and Direct Taxes

On 8^th August Morning, most of our newspapers, both national as well as regional ones carried big headlines about the giant leap in the income tax returns received as well as the increase in advance direct tax collections. The media has attributed this huge achievement to the demonetisation executed by the Government, exactly 9 months before on 8^thNovember 2016. Finally, it turned out to be that demonetisation started to reap its benefits to the nation. Naturally the apologists of demonetisation, started to cheer again after a long gap and these news are widely shared over the social media.

But the fact-checker in me became curious with this claim of 24% jump in the number of returns filed. The figure of “2.82 crore returns filed in this assessment year” does not look so huge because I have delved into these data 3 months back for doing an article “Why Duplicate PAN Cards Are Not as Big an Issue as the Modi Government Claims”. Numbers used to stay in my mind, so it came to my memory that there was a Parliament question asked about “the number of returns filed”. I was sure that the number is very close to the figure of 2.82 crores, so this 24% hike looks unbelievable. 

New Definitions of Tax Payers

Also Government recently redefined “tax base”, “tax payers” and “new tax payer added” which are taking into adding the “number of persons from the TDS/TCS deductions are made” with the “number of returns” received in a year. This change was effected by accepting the “Report of the Committee for recommending standard definitions of certain terms” chaired by Sri. Avadhesh Kumar Mishra. So I am quite baffled why the Government is going back to the “number of returns filed” rather than the “number of total tax payers”? All these forced me to do a fact check on the above claims.

Firstly, I searched the Parliament Question database. There is a question on 01.03.2016 in the Rajya Sabha (QN no. 557 asked by Sri. Bhupender Yadav). Government answered that during the AY 2013-14 (FY 2012-13), 2.857 crores individuals in the age group of 25 to 60 years were filed by the income tax returns. No information about the total number of the returns filed in that particular year was shared in the answer. But even this part data of 25 to 60 years age groups of 2.857 crores in FY 2012-13 is higher than the figure of 2.82 crores for last financial year in the news! 

CBDT Press release dated 7^th August 2017

Let’s scrutinise the press release by the CBDT dated 7.08.2017 to separate the wheat from the chaff. The newspapers carried headline news based on the above press release. CBDT made an odd comparison of returns filed as on 05.08.2017 with the returns filed during the corresponding period in previous year. Normally, CBDT makes such comparisons based on financial year or assessment year rather than midway on some odd date like what they did in the press release. American writer Rex Todhunter Scot once said, “There are two kinds of statistics, the kind you look up and the kind you make up.” Of course, skewed statistics are always misleading and gives a distorted picture.

The last date for filing income tax returns by the individuals and Hindu Undivided Families (HUF) for this AY 2017-18 was extended from 31.07.2017 to 05.08.2017. Same time, the business assessees who needs mandatory auditing can file their returns up to 30.09.2017. If we look at the income tax return statistics for AY 2014-15 (which is the latest of the assessment year, for which such detailed information of assessees are available, as of today) at CBDT website, the first group comprises of 96% of the total assessees who should file returns within 5.08.2017. The number of assessees under business entities, who is remaining to file returns within 30.09.2017, come only a marginal 4%. Though returns can be filed after due date till one year after the end of the assessment year, it will attract interest and penalties. A new section 234 F is now inserted into the Income Tax Act, 1961 in this regard imposes more fine and make it more rigid.

Number of Tax Payers and Returns

Though this part data comparison of 2.82 crores returns as of 05.08.2017 with corresponding previous year did not hold good, it is important to look at the  number of actual returns submitted in the previous years for a comparison consider the fact, 96% of the returns should be filed within 5.08.2017 deadline. For this, I have relied the CAG Report No. 2 of 2017, Department of Revenue – Direct Taxes (See Table 1.3, at Page 3), which gives the number of actual returns filed by the non-corporate assessees between FY 2011-12 to FY 2015-16. The foot note in the table clearly indicates that the above “figures are based on the actual returns filed during the respective year”.

From the above table, it is clear that the actual number of returns submitted by the non-corporate assessees during the last financial year is 3.98 crores. Due to PAN-Aadhaar linkage insistence and other reasons, a vast majority of individuals filed their returns before the deadline of 05.08.2017. Even then the number is 2.82 crores as per the press release of CBDT, which is only 71% of the total non-corporate assessee returns filed in previous financial year. This data clearly indicates there is no big jump like 24% as claimed is going to happen in the number of returns to be filed within this assessment year. Of course, we have to wait till the end of this assessment year to know the final figures of the same. 

The above surmise is based on the figure of effective assessees for AY 2016-17 (FY 2015-16) published by the CBDT as “Income Tax Department Time Series Data Financial Year 2000-01 to 2016-17” (See Table 1.7 at Page 9). This data is including the “number of people who filed returns” plus "number of people from whom TDS/TCS are deducted” as per the new definition approved by CBDT (See the note at the bottom of the table). We should take note that the total number of returns are nothing but a subset of this data of number of effective assessees. There should be corporate/business entities return will be added to this figure, but that number was just around 16 lakhs during the AY 2014-15, comprising hardly 4% of the total returns.

So let’s look at this data for to see the trend of the number of effective assessees till FY 2015-16 (AY 2016-17). The graph shows that the year to year growth of the number of effective assessees is falling from 11.78% in AY 2013-14 to 7.08% in AY 2015-16 where final data are available. The provisional data for AY 2016-17 showing that it is further declined to 2.34%. So a comparison with last couple of years are imperative to compare the present AY figure rather than a part data with FY 2015-16. The Effective Assessees shown a downward trend from a year to year growth of 11.78% in 2013-14 to last 3 consecutive years. So any comparison with AY 2016-17 (FY 2015-16), which shows one of the lowest year to year growth, is not going to give you any correct picture. All these indicators and “part data of 2.82 crores returns” released by CBDT for last FY 2016-17 clearly denotes that there is not any substantial jump in the total number of effective assessees or number of returns filed, if we consider the whole financial year or assessment year as the yardstick for comparison. 

Another document which leads light into the number of tax payers is the Economic Survey Vol. 2 (See Page 22). It discuss as follows:

“1.85 Did the signalling effect of demonetization—namely that there would be decreased tolerance of tax non-compliance highlighted in the Union Budget for 2017- 18—have an impact on tax compliance? According to the tax data, the number of new individual tax payers (based on returns filed) increased from 63.5 lakh in 2015-16 to 80.7 lakh in 2016-17. But all this increase cannot be attributed to demonetization because there is some natural trend increase in new taxpayers. Instead, this impact by measuring the increase in taxpayers in the post-demonetization period (Nov. 9, 2016-end-March 2017) relative to the increase in the same period the previous year is estimated.  

1.86 As the Table 6 shows, the growth of taxpayers post-demonetization was significantly greater than in the previous year (45 percent versus 25 percent). The addition amounted to about 5.4 lakh taxpayers or 1 percent of all individual taxpayers in just a few months. The addition to the reported taxable income (of these new payers) was about Rs.10,600 crore. So, the tax base did expand after demonetization. It is, however, interesting that the average income reported of the new taxpayers-Rs. 2.7 lakh- was not far above the tax threshold of Rs. 2.5 lakh, so the immediate impact on tax collections was muted. The full effect on collections will materialize gradually as reported income of these taxpayers grows.”

Here Economic Survey trying to be modest, but same time trying to prove that there is some influence on demonetisation. Economic Survey put the number of new tax payers have increased after demonetisation as 5.4 lakhs or just 1% of all individual tax payers. This 1% may be a round off to the single digit with respect to the total tax base, because we have seen from the other table that 6.27 crores total tax payers are there in FY 2015-16. But even Economic Survey conveniently shut its eyes to the number of tax payers added in the previous year 2014-15 where in 76.04 lakh new tax payers were added, while last year added only 80.7 lakh new tax payers and which was compared with 2015-16 figure of 63.5 lakh. 

Please see the Annual Report of the Ministry of Finance (FY 2015-16, Page No.155). So even the modest figure looks gloomy in this background. So if correlate it with FY 2014-15 data, instead of FY 2015-16 figure, we can see that additional tax payers added will shrink to just 1.4 lakh people! 

So final take is that there is nothing substantial to boast about the new tax payers added due to demonetisation as the number is so insignificant. Once CAG finalises the audit of FY 2016-17, we will get a real picture and we can wait for the same.

Direct Tax Collection

Tax revenue resources of the Union Government consist of revenue receipts from direct and indirect taxes, which are now almost in the ratio 1:1 for the last financial year as per CBDT statistics.

Direct taxes levied by the Government mainly comprises:

i. Corporate Tax levied on income of the companies;

ii. Income Tax levied on income of persons (other than companies);

iii. Other direct taxes incl Wealth Tax, Securities Transactions Tax, etc.

As per the latest data released by CBDT, these taxes are distributed as Corporate Tax (57%), Personal Income Tax (41%) and other direct taxes (2%).

There are different mode of direct taxes collection {Tax deducted at source (TDS), advance tax, self-assessment tax, regular assessment tax} in respect of both corporate and income tax. Collection through advance tax, self-assessment tax and TDS is largely indicative of degree of voluntary compliance in the system. Collection of tax through regular assessment mode occurs on assessment. The division various components of direct taxes for FY 2016-17 is as shown in the pie chart.

CBDT press release made another claim on direct tax collections:

“The effect of demonetization is also clearly visible in the growth in Direct Tax Collections. Advance Tax collections of Personal Income Tax (i.e. other than Corporate Tax) as on 05.08.2017 showed a growth of about 41.79% over the corresponding period in F.Y. 2016-2017. Personal Income Tax under Self-Assessment Tax (SAT) grew at 34.25% over the corresponding period in F.Y. 2016-2017.”

So this statement is talking about a convenient truth, that too about a part data series. “Advance Tax” is around 41% of the total direct tax component, as we see from the above Pie Chart. Then “personal income tax” is also 41% of the total direct taxes. So here, CBDT conveniently talking about 41% of personal income tax component of the advance tax, which is also 41% of the direct tax. Hence net effect of the advance tax of the personal income tax component comes around 16% of the total direct tax collection. Similarly, self-assessment tax is just 8% of the total direct tax collection and when we consider its personal tax component, it will shrink to 3.3% of the direct tax collection. So here, the CBDT is just doing cherry picking of the 20% of value of total direct tax collection and comparing it with some arbitrary date, while totally silent about rest 80% of value!

Why CBDT is not speaking about the corporate tax and other components or about the entire direct tax component instead of this cherry picking? The answer lies in another press release by CBDT dated 6.07.2017, soon after first quarter direct tax collections ended in June 2017.

Closely examine the first paragraph:

 “The provisional figures for Direct Tax collections up to June, 2017 show that net collections are at Rs. 1.42 lakh crore which is 14.8% higher than the net collections for the corresponding period of last year. Net direct tax collections represent 14.5% of the total Budget Estimates of direct taxes for F.Y. 2017-18 (Rs. 9.8 lakh crore).”

Here, the picture is clear, the direct tax collections grow at 14.8% than the corresponding quarter during previous year. But please look at the larger picture, Government was in receipt of only 14.5% of total budget estimate for FY 2017-18 in the first quarter, wherein the collections should be around 20% normally. CBDT was only able to collect only ₹1.42 lakh crores towards direct taxes in the first quarter against the estimated budgeted target of ₹9.8 lakh crores for FY 2017-18. This is an under realisation of the estimate target? I am leaving the answer to your own judgement.

But this warrants a close examination of direct taxes collection over the last six years and its year to year growth, which is provided by CBDT in “Income Tax Department Time Series Data Financial Year 2000-01 to 2016-17” (See Table 1.1 at Page 2).

So the total direct tax collection recorded during the first quarter at 14.8% is only a marginal improvement over the last FY’s year to year growth component of 14.54%. From the above graph we can see that the direct tax collections showing a steady upward trend from 2011-12 (10.7%) to 2012-13 (13.6%) to 2013-14 (14.24%) during the UPA-2 regime under Dr. Manmohan Singh. But during the NDA regime under Narendra Modi, the year to year growth fallen to 8.96% in 2014-15, 6.63% in 2015-16 and shows some recovery of 14.54% during 2016-17, but it is based on a low base in 2015-16. If the direct tax collection followed the same trend in Dr. Manmohan Singh era, take it as 14% for next 3 years, it would have touched ₹9,46,108 crores instead the present collection of ₹8,49,818 crores!

Also the figure of ₹8,49,818 crores should be taken with a pinch of salt as there was an Income Disclosure Scheme (IDS-2016), which resulted a disclosure of ₹65,250 crores prior to the demonetisation. As the tax collected from this scheme is 45% of the disclosed amount, it would be ₹29,362.5 crores. Also it is mandatory to pay 50% of the above tax in two instalments in the last financial year and remaining 50% before this September end. So there was a component from IDS amounting to ₹14,861 crores was part of the direct tax component in last financial year. I am not considering the Pradhan Mantri Garib Kalyan Yojana (PMGKY) which was announced after demonetisation, which turned out to be a damp squib. As per newspaper reports, the direct tax collected under this head was only ₹2300 crores though it was expected to collect anything between ₹50,000 crores and ₹1,00,000 crores! So if we remove the component of IDS-2016, the direct tax increase of year to year even from a low base of FY 2015-16, is reduced from the 14.54% to 12.56%!

To summarize:

• Any amount of increase, even the marginal 5.4 lakh new tax assesses or 1% of the total income tax base presented in Economic Survey will further shrink to just 1.4 lakh tax payers, if it is corroborated with FY 2014-15, wherein 76.04 lakh new tax payers were added to the tax base.

• Tax collections were already under a steady growth till 2014 and in fact was growing 14% in FY 2013-2014. But it had a sharp drop in FY 2014-15 & FY 2015-2016 period, which has now rebounded to FY 2016-17 to above 4%. But if we consider the contribution due IDS-2016, this will further drop to 12.56%.

• Taking above two together, there is neither a sudden surge in number of people paying taxes nor amount of taxes that are collected by the government which can be seen as a breakthrough. For that, we have to wait for few more, hoping that the government doesn’t change the methodology in between. 

So all these hard data from the CAG, CBDT and MoF proves that there was no substantial increase in the number of new tax payers or direct tax collection due to demonetisation. The CBDT with its selective press release, helped the Government to manage headlines. As usual our gullible main stream media became mere stenographers and amplifiers carried the news with thick headlines without any fact check. We are still waiting for the Government to come out with at least one single area where this demonetisation benefited the economy, of course, based on solid data rather than shoot and scoot with half-baked data.