Trauma of the Indian taxpayer

What are we paying income tax for? Why are individuals taxed on gross income while corporates are taxed on net income?

From March, when the financial year ends, right up to July, when tax returns are filed, is a traumatic period for most taxpayers in India. The Credit Suisse Global Wealth Report, 2019, says India has 759,000 dollar-millionaires, who should ideally be filing their IT returns, but surprisingly, the latest statistics (AY2018-19) on the CBDT website shows that only 29,000 dollar-millionaires declared an income in this range and actually filed returns. India, with its population of 1.38 billion, sees only 58.7 million tax returns filed. Worse, 10 million returns are filed by people earning less than Rs 2.5 lakh per annum, who pay no tax at all.

What do these 3.5% tax-paying Indians get in return? Public education, right from school level to colleges, has disappeared from the lives of the urban middle class. So also, public healthcare – when was the last time a taxpayer got herself treated at a government hospital? Despite the exorbitant charges in private hospitals, one is forced to depend on them.

Water, in most Indian cities nowadays, comes from private borewells and water tankers, necessitating a taxpayer to pay for clean water. Taxpayers pay for security, too, even rudimentary security when hiring personal security staff or guards. Travel by road requires taxpayers to pay toll, airports require user development fees. Salary-earners in the private sector, after paying taxes all through their work lives, find that the tax doesn’t get them a pension, unemployment support or post-retirement healthcare benefits. When an individual, after diligently paying taxes each year, suddenly loses his or her job due to the coronavirus pandemic, the family does not see any direct benefit out of all that tax paid! Income tax paid by senior citizens and retirees is increasingly becoming a traumatic form of forced charity.

Is the sense of alienation, low tax-morale and zero motivation for people to pay taxes in India any surprise? Taxpaying salaried employees perceive a sense of unfairness, while other categories, like the self-employed or businesspersons, get away by paying minimal taxes, and farmers enjoy a completely tax-free status. In a country the size of India, having only 3.5% of the population paying income tax, with no commensurate benefits to them from the government, points to a serious lacuna in India's taxation system. For in the end, it’s not how much you earn but what you show as non-taxable that matters.

After paying tax, the salary-earner finds that his tax payments are squandered in wasteful public expenditure and corruption decided on the basis of populism and vote-bank considerations, like the Ujjwala scheme where cooking gas connections were distributed free of cost, requiring further sacrifices from the taxpayer by “voluntary” withdrawal of subsidies. Yet, our elected representatives continue to enjoy privileges that no taxpayer does. Not only do they get to decide their own salary, their perks include free flights with companion, free limitless first-class train travel, free healthcare, rent-free housing and a pension, all paid for by the taxpayer!

Perhaps India is not ready for very low taxation rates or zero individual income taxes, although globally the UAE, Malaysia, Czech Republic, Mexico, Vietnam, amongst several other countries, adopt such a regime and save on massive administrative costs spent on collecting taxes from a minuscule taxpaying population.

But at least, why should salaried individuals be taxed on their gross income without deducting the expenses incurred by them, while business income tax is charged on net profit, not on the gross business income? Again, why tax the individual and not the family, when corporates are taxed as complete entities, not individually for each business? Indian parents require assistance in old age, with incomes required to take care of the elderly or to support children with tuitions, education and marriages. Currently, without catering to this reality, individuals pay income tax first and incur costs out of the balance income.

Why not make income tax into an ad-valorem tax, taxing value-addition, just like GST? Taxes paid on inputs should be offset in the final payout. Making income taxes paid adjustable against other indirect taxes brings in an element of honesty as individuals will ensure collection of receipts, ensuring tax compliance while purchasing even everyday essentials like groceries. Why not tie up tax payment with banking transactions or cash withdrawal? With the rich requiring many more banking transactions than the poor, the taxation system will get imbued with some fairness.

One reason taxpayers are uncared for is that they don’t matter as a vote bank. Maybe it is time to have a pan-India organisation of taxpayers with a mandate to ensure no distribution of free electricity, free water, loan waivers, etc.— in fact, no freebie announcements— without prior taxpayer consent. Meanwhile, special conveniences to income taxpayers, like faster lanes at immigration counters or priority issue of passports, would be more gratifying than appreciation certificates mailed to them!

(The writer is former Executive Director and Member, Board of Directors, BEML)