The black money haul

Sustained efforts are needed to expand the tax net

The Income Declaration Scheme (IDS) 2016, which ended on Friday, yielded the largest-ever declaration of black money. After starting slow, the scheme clearly hit a home run not only because of relentless government campaigns, but also because of the increased number of searches and surveys conducted by tax officials, especially in the last fortnight. At last count, Rs 65,250 crore was declared as unaccounted income and assets after 64,275 people used the four-month window. These figures are likely to be revised upwards as the final stocktaking is still being done. In the process, the government will raise Rs 29,362 crore as additional tax revenue, of which Rs 14,681 crore will come in during the current financial year. There are two key insights here.

One, the results of IDS 2016 establish that people paying income tax on a regular basis are only a fraction of those who should be paying it. This is especially true for those in the upper income brackets. After all, an average of Rs 1 crore income was declared per person in the IDS, which suggests that the scheme was used by people belonging to the highest income bracket. The "Income Tax Return Statistics" for the assessment year 2012-13 released in August this year showed that the top 1 per cent (in terms of income level) of the population accounted for 18 per cent of the total income, while the bottom 50 per cent accounted for just 21 per cent. Also, just 18,358 individuals declared incomes of over Rs 1 crore, and 1.5 per cent of taxpayers accounted for over half the personal taxes due. These numbers do not square up with sales of luxury cars, high-end accessories, gold and real estate. The second important takeaway from the success of the IDS is the need for the government and the tax department to focus on sustained efforts to expand the tax net. This implies both widening of the tax net, that is bringing non-taxpayers into the taxation loop, as well as deepening the tax regime, that is ensuring people pay tax on the full amount of their income.

What turned things around for the IDS was that as the deadline drew closer, tax officials knocked on many doors by sending notices and conducting searches, surveys, and raids. The process started with collating data from several sources such as mutual funds, fixed deposits, travel information, and mapping the beneficiaries of penny stocks etc. The key challenge now is to ensure that lessons learnt from this success are internalised to improve the normal tax assessment process. A more granular mapping of expenditure data is one way to widen the tax net. The intense round of surveys and searches has shown even those who are paying taxes are under-reporting their incomes. India's direct tax revenue base is too narrow - an uncomfortable position for an economy steadfastly trying to scale up social and infrastructure investments while maintaining a semblance of fiscal discipline. The government needs to push through meaningful reforms, but, more importantly, it needs to match the databases already available to prevent tax evasion.