Drop in income tax e-filers: Gains accrued from GST, demonetisation not enough, need to increase employment opportunities

Demonetisation and GST were two schemes that were brought in by the government ostensibly to bring out black money and get everyone into the tax fold. Prior to these policies, there were amnesty schemes, also called income disclosure schemes that were introduced by the government to give a chance to the public to come clean and pay taxes. The niggling issue was that with a population of nearly 1300 million or around 260 million families not more than 35 million actually filed tax returns. Was it a case of the country not having enough income to be taxed or was it that people were escaping paying taxes by exploiting the loopholes in the system?

Demonetisation was supposed to spread the net on those who dodged taxes but has proved to be a damp squib in terms of unearthing black money. GST was to ensure that all producers came under the tax ambit and left an audit trail. By putting the onus on every stage of value-addition to deal with those who have a GST number, there was an automatic transition to getting a large part of the SME segment into the tax fold. This was probably a more effective way of accomplishing the goal even though several exemptions were made under the composition scheme.

The latest data on the number of returns filed for FY19, however, shows a decline over FY18, which has brought the discussion back on the table.

Demonetisation was introduced in November 2016. The table shows that in 2015-16 which is one year before demonetisation was brought in there was an increase of 9.2 million in the number of taxpayers. Post demonetisation there was maximum pressure on individuals/companies to file their returns to avoid the taxman. However, in incremental terms, the number was 9.5 million in FY2017, which is only marginally higher than that in FY16 when there was no policy push.

GST was a turning point as the increase was of the order of 14.6 million which is an all-time high. Subsequently, in FY19 there has been a decline of around 0.6 million, which is the surprise element as ideally, one can think of no change or just a marginal increase. How did this happen?

Assuming the data is updated and that there will be no revisions in these numbers, one reason for this decline in the number of tax filers can be that there was a large number of people who have filed their returns who did not have any income to declare which includes senior citizens or those whose incomes were below the minimum threshold. Such persons would have been out of the system in FY19 which has led to a decline in the number of filers. Also with several SMEs having financial stress, the layoffs could have affected one segment of taxpayers in the lowest income group.

The table below provides the number of income tax filers based on income.

Distribution of income tax filers based in income

Source: Income tax e-filing

The interesting takeaway here is that for all income groups except the one of less than Rs 5 lakhs, there has been an increase in the number of filers with the Rs 5-10 lakh income category witnessing the highest increase in tax filers of around 20 lakhs. This should be viewed against the backdrop of a decline in the number of tax filers of income of less than Rs 5 lakhs which came down by around 34 lakhs. For sure there would have been a migration of persons who had an income of less than Rs 5 lakhs moving up the income ladder in FY19 which would be there for almost all the income groups as it seems unlikely that there would be a substantial number of fresh filings of persons in the higher income groups. Therefore there is a strong reason to believe that one category of tax filers has moved out for the reason that they are not liable to pay taxes and had filed their returns post demonetisation on account of the fear factor.

What does this mean going ahead? It does look like that there has been some kind of stabilisation in the number of tax filers and that the increase in future will be the normal trend. As new professionals enter the job market and earn an income, the number of filers will increase. Hence the clue will be higher job creation in the higher categories of income in order to increase tax collections. Creating jobs at the level of say delivery boys or billing tellers in retail stores would be in the less than Rs 5 lakh category of income and will not get captured here.

Also curiously this also indicates that the thought that there was high evasion of taxes with the number of taxpayers being very low was incorrect as the gains that accrued on account of two major formalisation policies have their limitations. There is a need to increase employment opportunities which will lead to higher growth and tax revenue. This has to be kept in mind.

We have seen that Budgets have only ended up taxing the taxed community – in terms of LTCG or even the tax treatment to debt income earlier. There are clearly limitations to the growth in tax base due to better compliance and for this to grow, more employment is necessary. This needs to be accepted.

(The writer is chief economist, CARE Ratings)