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Time of India
a day ago
- Business
- Time of India
India's inefficient tax collection methodology – a review is needed!
Homeyar Jal Tavaria is a professional accountant with interest in the science of accounts and audit, observer and commentator on macro economic commercial, financial and economic events, occasional blogger'. LESS ... MORE The main heads of tax collection in India are Income Tax, Goods & Services Tax (GST), excise duty, customs duty, and securities transaction tax (STT). There is enough empirical data to show that our tax collection mechanism is faulty and there is definitely serious tax evasion at both the direct tax (income tax) and indirect tax ends (mainly GST). For the purpose of better understanding, we need to break up the 2 main heads of tax collection (income tax on sources of income – different income heads) and GST tax – on consumption of goods and services. We are all aware of the anomalies and failures of income tax. Certain types of income (agriculture income) are fully exempt, significant number of PAN Card holders do not file income tax returns. Also, one can be reasonably sure that the maximum payment of income tax (% of income tax payable to taxable income) is in the middle tier. The bottom tier % of income tax paid will be low because of progressive taxation rates and allowed tax deductions, while the upper tier manages the taxability of income very well, exploiting the exemptions and set offs extremely well. Similarly, we seem to be having some issues with GST collection. The geographical states spread across India and GST collections from those states linked with the Gross State Domestic Product (GSDP – cumulative being national GDP) are giving surprising results. Note – there is not much available in the public domain on GST collection details in terms of applicable years and geography (state contribution). However, whatever data is available is raising plenty of issues on the quality of GST tax collection and the need to really review the entire tax collection and tax payment system. For the year 2024/25, the Top 10 GST paying states of India and the GSDP generated by them for the year 2023/24 are as under. Note that the data years are different, but the issue of concern being raised does not get really impacted. Details are as under: State Rank Name of State GST collected / GSDP values – % GST collected – Rs Billions 2024/25 GSDP generated – Rs Billions 2023/24 1. Maharashtra 7.88 3184.97 40443.00 2. Gujarat 7.94 1749.38 22034.00 3. Karnataka 5.72 1430.23 25007.00 4. Tamil Nadu 4.13 1124.56 27216.00 5. Uttar Pradesh 4.15 1057.89 25479.00 6. Haryana 9.98 982.34 9841.00 7. West Bengal 5.72 876.54 15318.00 8. Rajasthan 5.64 765.43 13579.00 9. Telangana 4.99 654.32 13118.00 10. Andhra Pradesh 4.16 543.21 13035.00 Notes: GST being a consumption-based tax, one would have thought that the states GST collected and GSDP generated % would largely be in one narrow band as percentages. That is not the case per the data above. There are 3 percentage bands coming up – More than 7.5% (GST / GSDP %) – states contributing Maharashtra, Gujarat, Haryana Between 5% to 7.5% – states contributing are Karnataka, West Bengal, and Rajasthan Below 5% – states contributing being Tamil Nadu, Uttar Pradesh, Telangana, Andhra Pradesh. The Western India states of Maharashtra and Gujarat are in the top contributors, while surprisingly, the Southern India states of Tamil Nadu, Telangana, Andhra Pradesh are the laggards. Such a big differential in GST contribution % needs to be looked into. The North India and East India states need to shake off their lethargy and become worthwhile indirect tax (GST) contributors. It would help to analyse why certain states have such low GST contributions as % of GSDP. There is a mine available to be exploited. India has to significantly upgrade its GST tax collection mechanism. The above collection % differential highlights that the tax collection structure needs a review. India cannot be sanguine that the direct and indirect tax collections are buoyant. The buoyancy is on a weak foundation base, and the tax structure needs a major relook to keep the buoyancy going and ensure that all are caught in the tax net so that the taxes can be called fair and equitable taxes. Fair and equitable taxes ensure that businesses are operating on a level playing field. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
Time of India
29-05-2025
- Business
- Time of India
Taxing matters – Tax income or tax expenditure!
Homeyar Jal Tavaria is a professional accountant with interest in the science of accounts and audit, observer and commentator on macro economic commercial, financial and economic events, occasional blogger'. LESS ... MORE It would not be an untruth if we say that the Indian Income Tax is against all canons of taxation – it is not equitable or fair considering that major income heads like agriculture income are not taxable, that income like dividend is taxed again. A salaried employee or a retiree / pensioner with monthly income of say Rs 2.00 lakhs pays income tax but an agriculturist with Rs 7.50 lakhs of monthly income escapes the income tax net. Why and how the Indian income tax act as structured and implemented is not challenged constitutionally as an unfair legislation cannot be understood? All the NGOs and social activists who rush to the Judiciary on matters like pollution, environment damage, illegal refugees sometimes even terrorist sympathisers, have not deemed it fit to fight against an Act that is blatantly unfair. The very fact that just 5.0% of the country's population files income tax returns (requiring tax deduction at source, advance and self assessment tax payment), shows dreadful injustice to this class of assesses, while others (agriculturists, non-formal employment practitioners go scot free). When the political die is cast against an effective and equitable income tax act bringing people in the tax net on earnings and not type of earnings, there is a need to take a look at income tax. Suppose the concept of tax on income is deleted, what would be the consequences for those who are income tax payers: There would be greater cash in hand of those impacted by removal of income tax; This increase in income will have 3 consequences – higher consumption, higher assets purchase, higher savings; Knowing the Indian mind, a lot of higher income will go into improved children education, purchase of house, gold, savings & investments. In India, we have made the mistake of linking certain government savings plans with eligibility for tax exemption – PPF, other government savings plans. Certain payments for life insurance, hospitalization policy premium were given income tax deduction. All these will automatically come to an end. The earlier income tax paying individual will need to take a view on how to use the surplus cash earnings. How and what he spends on and what is the nature of his savings is now totally in the control of the individual. Since there is no income tax legacy impact – the individual will decide the % of his savings in Govt savings schemes and % of savings in private investment (corporate fixed deposits / mutual funds / capital market investment in shares) and investment in assets like residence, motor car, gold and precious metals and gems. Since the Indian population is psychologically against the Government taking a part of his/ her earnings in the form of income and the law permits types of earnings differential treatment, one must look at the other side of the coin which is individual spendings / consumption. There is a need to take a relook at the structure of our indirect tax regime. We must remember that both central government and states share income tax revenues thru devolution. Both types of Govt benefit from higher consumption. Tax evasion / tax avoidance / tax planning is not just in direct tax. It is very much in use even for indirect tax. Take the case of Goods & Services tax (GST). The individual has no Role to play in giving any submissions, forms, records, etc to the Indian Revenue (Tax) authorities. The submissions on GST liability come from businesses / traders / vendors, etc. All of us are aware that GST is collected from us as individuals but often not deposited into the Governments treasury (central and state). They often land up as profits for the last link of the Business to Customer chain (B2C). As a nation we are in critical times – with such a small direct tax base of individuals following the income tax law, the increasing demand from a growing Indian economy for infrastructure / defence / education / connectivity, etc we will need to improve the Receipts side of the Budget. Remember growth rate on compounding basis will increase demand for Tax Revenues. There are 2 options available: Improve the indirect tax collection where there is no doubt there is significant tax evasion (along with income tax being done away with). The indirect tax structure and collection mechanism needs to improve significantly; Improve the dividends & profitability of central govt undertakings to get better Receipts. This is an area needing attention. As a nation we need to understand that higher national or individual debt is not the answer. The answer for India is significantly improved indirect tax collection and better central & state government public sector units management. It would be a truism to say that India needs a new Tax Code for it's future needs. The existing Direct and Indirect tax laws will not serve the purpose. We cannot allow old maxims of direct tax is progressive tax (in fact in India it is very regressive), that public sector is family jewels (those jewels must give proper returns and increase India industry growth) and take a relook our tax methodology. The tax employees who are today part of the direct tax administration move to indirect tax administration. Clearly, giving scope for better indirect tax administration and enforcement. The individual is no longer connected with the tax department, only businesses would be connected. One big advantage of doing away with direct tax would be the deletion of the concept of income escaping income tax and becoming black money. When income is conceptually not taxed but consumption is taxed, black money as a concept dies for individuals. It remains for business where direct and indirect tax remain. That can be better supervised. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
Time of India
02-05-2025
- Business
- Time of India
‘Follow the Money trail!'
Homeyar Jal Tavaria is a professional accountant with interest in the science of accounts and audit, observer and commentator on macro economic commercial, financial and economic events, occasional blogger'. LESS ... MORE One of the most important financial advices given to a financial professional is – 'follow the money trail'. In plain language, it means track who has finally benefitted from the event / service and / or has made payment for the same. Money never changes hands unless there is a benefit or advantage derived from the exchange. One can apply the lesson of 'follow the money trail' to many events that are happening in India today: International rankings and ratings — whatever we in India may do to improve on international rankings such as health index, hunger index, per capita income, democracy index, national health index, etc — the subtle message coming thru is that you are not good enough. There is a lot of distance still to be covered by the country. In many cases, there are some very surprising countries ranked higher than us. The issue that we in India have to focus on who is the organization making the rankings and who is funding the organization. It is almost certain that the Report creation by NGOs / influential thinktanks is funded by Financiers, Investment Trusts, etc who have a clear anti India agenda. There are many such entities in the World -worried by India rising economic and political power who would want to sow seeds of unhappiness, dis-satisfaction, despair, to make the country feel small and not upto the status that it merits and deserves. The next time the Indian media quotes the findings of these Bodies and quotes their Reports as gospel truth – they should find out who is funding such organizations and mention their names in the news disclosures. That would immediately inform the reader / viewer as to whose vested interests are being served. For all the severe criticism President Trump is facing, he has highlighted the use of USA money for interference in our Nation political activity. There are vested interests outside India who want to see a destabilized India and sadly there are many powerful & influential press and media commentators who will keep this matter of India poor ranking alive. We are all aware that the one who pays the piper calls the tune. These rankings and reports will finally closely align with the objective of the Sponsor or the Funding entity. Income Tax Returns filing — it is a well known fact that very few Indians file Income Tax Returns though very large number of persons possess PAN Cards. It is opined by many Tax consultants and individual income Tax experts that possessing the PAN card is a ruse to escape high TDS rates on dividends income. The TDS (tax deducted at source) on dividends is less if there is a PAN card number submitted by the shareholder to the company. The income tax return will not be filed, though lower TDS rate will be taken advantage of. 'Follow the money trail' strategy could be brilliantly used for such cases where income tax returns are not filed. The process could be as under, thanks to success of the JAM trinity (explosion of Jan dhan bank accounts – Aadhaar card – mobile phone). Many possess bank accounts now: Distinguish the income tax returns filers from those who do not file returns. Mainly, savings bank accounts and PAN Card numbers are linked. In the month of April (start of new accounting year), the bank savings account holder (above 21 years of age) with linked PAN Card # informs the bank whether he has filed an income tax return – in April '25, the individual submits proof of submission of income tax return for accounting year 2023-24. If there is proof of submission of income tax return, the Role of the bank ceases. However, if there is no validation of income tax return being submitted, the banker has to play an important Role. For those over 21 years of age, every month based on credits in the savings account of those not filing income tax returns (except interbank funds transfer), the banker does a Tax collection at source (TCS) at say 12% of the total monthly receipts credit and remits this TCS money to the Central income tax treasury. A TCS % rate between 10-15 % is fair. Every month, the individual's bank account has a debit for tax collected from his bank account. An annual statement of TCS deducted and paid to Central Govt Income Tax is provided. This way the banking channel is used for tax recovery for non income tax returns filers – on amounts credited to bank account. In case an individual has a problem on high tax collection at source, he / she should file an income tax return and claim the extra tax deduction as a refund. Of course, the Income Tax Dept will need to be invested into to support the higher Returns submissions and assessments. This 'follow the money trail' policy will see higher individual income tax collection and more income tax returns being filed. The biggest advantage of this method of 'tax collection at source' is that it impacts all non income tax filing individuals equally. Equity and Justice come back into income tax collection and the income tax base of income tax players expands. Many individuals running businesses in unorganized sector and agriculturists with other taxable income sources would get impacted. The income tax rules for computing taxable income stay and you have the freedom to file income tax returns and claim tax refunds, as applicable. CONCLUSION – It is clear that this 'follow the money trail' policy brings transparency in purpose of country ratings and rankings and improves tax collection in India by tapping bank credits. 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