Unquestionably and historically, we have had one of the least efficient — or sluggish, if I may say so — tax systems any country in the world would have. And if we looked at the constitutional mechanism in India, the direct taxes are normally collected by the central government; and in the large number of indirect taxes, both the central government and the state governments have their jurisdiction in relation to different areas. There are no overlapping areas.
I said in a public speech, post demonetisation, that we are trying to change the normal in India. The tax base is extremely, extremely narrow. This year, in my Budget speech, I had put forward the data relating to the previous years indirect taxation. A country of 1.25 million people with a very narrow tax base — and effectively we had a tax exemption limit of Rs 2.5 lakh; you had a small amount of taxes being paid up to Rs 5 lakh — beyond Rs 5 lakh, when the real taxes started coming, the total number of people (and I am not including companies in this, companies are separate) who paid those taxes were 78 lakh. Of these 62 lakh were those, who were salaried. So their taxes were compulsorily deducted. So this entire universe of individuals, business, trade, shopping arcades, lawyers, doctors, architects, professionals, people earning income from rent… who were paying more than Rs 5 lakh, was 17 lakh. And therefore, the tax base itself was extremely small.
The normal was large amounts of cash currency moving in the system. Transactions in cash. Property purchases partly in cash, partly in cheque. Parallel account books for any business. And in a society, which is otherwise fairly religious, moralistic and considered itself ethical, this was one area where evasion was the rule.
I have analysed the data for indirect taxes for the first two months of the GST. The entire universe of indirect tax structure conventionally was multiple taxes levied by the central government and multiple taxes levied by the state government. Seventeen of those taxes have been merged into the GST; 23 cesses have been merged into one tax. We had a total of about eight million people, who were registered under these different taxes. There was an overlap. If you were in manufacturing and selling, you were registered for central taxes and VAT under the state government… and now in the GST registration you have 7.2 million migrating to the GST; 2.5 million new people have been added because it is a more efficient system. So we’re now close to about 9.8 million, we will slowly increase.
For the first month, we have only had 5.5 million, who have paid the tax — paid, that is, filed their returns. Forty per cent have paid nil as tax; 95 per cent of the taxation for the first two months has come from only 400,000 assessees. So even now, the tax-paying habit, of paying a marginal or negligible amount, or not paying anything at all, is quite prevalent.
So what is the challenge before a tax system in a country of this kind? Obviously, you have 12 to 15 million cars being bought every year. You have 20 million people travelling overseas every year. And if you compare it with the spending data, the base itself is extremely narrow, which indicates there is a huge amount of tax not being paid. And eventually, one day you will find that there would have to be some linkages between the lifestyle and expenditure and the taxes paid. Fortunately, the privacy judgment of the Supreme Court carves out in, one of the judicial opinion given by the judges, the revenue interests of the state as one of the exceptions to the law of privacy, and therefore, when you go to buy a car you may have to give your UID number; when you book your international air ticket, you will have to give your UID number.
The realisation that the state needs revenue to survive… and where is this money spent? If you see the break-up in Indian Budgets: you spend some money on committed expenditure, paying for the loans the government has taken — that’s inherent in deficit financing. Then we have a committed expenditure on national security and defence. Governments need to service themselves on salaries and pensions and so on. And then you come down to a lot of developmental expenditure that you require. And that developmental expenditure really has to — in a country like India — support those sections, which actually remain outside the growth story and therefore, when you have a higher growth rate, and obviously larger revenues in the government, you have to take off a large part of the revenue and spend on poverty alleviation schemes, on providing social infrastructure… So it is very easy to argue you must spend more on education, more on health, more on national security… but that’s the money, which has to come from this revenue. And that’s the money that doesn’t come because of the so-called “normal” which had existed — that we are not a compliant state. And frankly, over the last several decades, serious efforts to expand this base and real efforts have not been made. You’ve had marginal efforts. And therefore, we, in the last few years, tried to make very serious efforts in order to ensure that this base itself increases.
In order to increase the base, for instance, in direct tax this year, in order to incentivise people to come within that direct tax limit (the lowest slab if you go beyond Rs 2.5 lakh, which is 10 per cent) India has the lowest possible rate and no other country has that kind of rate) so if you just have that kind of income and you enter, we created a slab of five per cent, You just pay five per cent. And that five per cent is also subject to various incentives. So if you have savings… particular kind of savings, then you get deductions. So effectively you can reach a reasonable income of around Rs 50,000 a month and end up paying almost negligible tax, or very little tax but you come within the tax net.
One of the great objectives is to use technology. Technology serves two purposes. It serves the purpose of expanding the net, tracing out the expenditure — and I was checking out the figure that we’ve been able to reach till March 31, 2017, is about Rs 6.36 crore. That’s a significant expansion and the bulk of this expansion over the last three years has not come in the number of companies… it has come in the number of private individuals who are coming more and more in the tax net.
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Edited excerpts from Finance Minister Arun Jaitley’s address at the South Asia Institute’s Mahindra Memorial lecture at Harvard University on October 11