How the Centre plans to use tax data to settle social justice issues

The govt committee on EWS might have set the template for future; EWS limits and income tax exemption limits are now twinned, if the Supreme Court accepts the panel's report

It is rarely that an income tax record is used to settle a social justice question in India. But that has happened in the report of the three-member committee formed by the Centre to revisit the definition “economically weaker section” (EWS) for reservation in education and jobs. It could also settle for the future, the penchant among departments to use surveys to figure out how welfare schemes work and instead using self-correcting feedback loops. 

But for the finance ministry, a new challenge has emerged. EWS limits and income tax exemption limits are now twinned, if the Supreme Court accepts the report. You can’t change one without altering the other. 

Tax data and quotas

The choice of selecting tax records as the stalemate breaker was also guided by a key consideration that had little to do with the entrance exam for doctors for post graduate studies. In the span of two years since FY19, the central and state governments have recruited several hundred employees under the revised definition “economically weaker section”. These ranged from the top level civil services to the junior most grades of support services. Those selections happened even as the yardsticks for them were challenged in the Supreme Court. 

The reasons why the central government readily concurred with the top court’s view for a quick turnaround on the legal challenges was the fate of these selections. The advertisements for the next batch of recruitments, through 25-odd examinations in 2022 by the Union Public Service Commissions, are already in process. 

Though the legal challenge to the government order revising the criteria for EWS had come from the aspirants for higher medical education, NEET, the more substantial difficulties came from this timetable of these public service exams.

For the three-member committee set up under Supreme Court orders, the implications were clear. They had to be fair and yet not let loose a torrent of court cases from the public service exams already held. 

This rationale guided the committee’s investigation into the criteria to determine who qualifies as an EWS. The panel consequently used an innovative approach that could become a template to solve many other issues of equity. Economists like Thomas Piketty have been advocating use of tax data in public policy to address issues of inequity. 

The committee members, former finance secretary, Ajay Bhushan Pandey, principal economic advisor, Sanjeev Sanyal and member secretary of ICSSR, V K Malhotra decided to tap the database of two departments. The sources the data of the department of personnel and training to match the profile of those selected through various competitive exams and their income threshold. They then used income tax data filed by the same candidates or their family to compare with the first set of numbers. 

The data was useful to establish whether or not the candidates selected under EWS category were bunched at the upper end of the income threshold of Rs eight lakh family income. If so, this could deprive the lower income candidates from the benefit of EWS reservations.

This sort of an exercise to match income tax data with household income was not possible earlier. There is a highly illustrative comparison (see table) the committee used from the records of successful EWS candidates from FY20 and FY21 in UPSC exams to argue that richer candidates are not prising out lower income candidates. “There is no evidence that the current cut-off of Rs eight lakh is leading to a major problem of the inclusion of undeserving candidates,” the committee report says.

They have repeated the same exercise with the results of joint engineering entrance exams and for NEET. The results are similar. However, one could argue that the data on family income furnished by the candidates for these exams are self populated. The richer source of data is the cross linkage of UPSC results with those of income tax returns. The committee, one understands, used anonymised data to protect the privacy of the candidates. But the cohort applying for the government jobs have no way of knowing that their tax records are also being matched with their self filed data. 

The exercise yields  a valuable answer to a Supreme Court query. Was the Rs eight lakh family income threshold too loose and was it subject to gaming by those near the ceiling? The tax data matching exercise shows it is neither. 

Income tax threshold

It also points to another public policy issue. In the current income tax exemption slabs, the effective income tax is zero for those with incomes up to Rs five lakh. If the person takes advantage of some of the permitted tax savings instruments the exempted annual income touches Rs seven lakh. The committee has made it clear it is in favour of retaining this linkage to establish the EWS threshold. “A fine balance has to be struck…to arrive at a figure which will ensure that most low-income people who are not required to pay income tax are not excluded and are covered in EWS  and (vice versa),” the panel report says.

Could this mean from Budget FY23, the finance minister will have to factor this limit? If Nirmala Sitharaman were to raise the income tax slab for those who do not have to pay tax at all from the current bracket, she risks a  peculiar situation. She will create a cohort that is considered poor enough not to pay income tax, but yet as their income is above Rs eight lakh, they are not eligible for quotas under the EWS category. This conundrum will, of course, apply only to those who are not in the scheduled caste and tribes or are counted in the backward castes. 

The three-member committee seem to have sensed the problem and have suggested revising the income threshold every three years. 

The big change stemming from this report is the emphasis they lay on stitching together real income data from all digital sources. Even if there was evidence of misuse, the Committee is of the opinion that it may be easier to mine the wealth of digital information to establish real income rather than get caught in a complex debate about ownership and valuation…Formalisation and use of data and technology would further help incorrect determination of income and thereby identification of EWS.

It would seem that this faith in how multidimensional income data is floating up to the different departments like GST, income-tax, digital payments, with financial institutions and real estate registrations. It gives confidence to the report, to junk asset criteria to decide between rich and the poor. Indian tax laws, municipal laws and just about everyone else has badly flunked in calculating who holds how much asset. 

“The better approach would be to use a feedback loop (using these data) to examine the actual outcomes from implementation of the criteria, say, every three years," the report adds.

This is, however, a new route and somewhat unfamiliar to the Indian judiciary. Income determination in court cases has followed decades old patterns. Incorporating GST, PAN, bank and mutual fund data is absolutely novel ground to sort through decades of inertia. 

And what about Aadhaar? The committee has not asked for it to be used, but all income tax returns use PAN data. All PAN numbers are linked to Aadhaar. It is consequently a linkage with huge significance.

Table: Annual Household Income of selected EWS candidates in UPSC exams

Service	< Rs 2.5 lakh	Rs 2.5-5 lakh	Rs 5-8 lakh
Recommended	33 (40)	17 (21)	26 (24)
Of which:
IAS	11 (8)	2 (7)	6(5)
IRS	2 (4)	2 (0)	2 (3)
IPS	5 (9)	3 (5)	7 (6)

Years 2019 and 2020 (latter in brackets); Source: Committee report