Personal income tax: Losing its relevance

Finance Minister Arun Jaitley put the spotlight on the issue of tax evasion in his February 1 budget speech with some eye-opening statistics.

- Amit Kapoor

Out of an employed population of approximately 300 million, merely 37 million filed their income tax returns in 2015- 16. Even if exempted sectors like agriculture are accounted for, this proportion is abysmally low.

The most damning evidence of evasion was the fact that out of 7.6 million individuals who declare incomes above Rs 5 lakh, 5.6 million are in the salaried class, for whom the taxes are deducted at source. Clearly, it cannot be the case that India has only two million businessmen and self-employed people who earn incomes above Rs 5 lakh. Tax evasion is rampant in the country and is especially high among the non-salaried class.

The facts in the Budget underline the unjust nature of the imposition of income tax in the country. The honest taxpayer is simply discriminated against. This happens in two ways. First, in Jaitley’s own words, “When too many people evade taxes, the burden of their share falls on those who are honest and tax-compliant.” Second, the complicated filing procedures and undue harassment later impose an additional shoe leather cost on the person paying taxes. These issues create incentive problems among taxpayers. It is in the payer’s best interest to find ways to avoid taxation.