[Opinion] Finance Bill 2023 – Sabka Saath, Sabka Prayas & a Stagnant Taxpayer Base!

Authored by Vishal Gupta – Founding Partner & Alok Kaushik – Associate Partner | Taxcraft Advisors LLP

The Hon’ble Finance Minister presented first Budget of the ‘Amrit Kaal’ on Feb 1, 2023. It seeks to leverage on foundation laid by the previous budget and is themed around identified priority areas that seek to drive inclusive growth by promoting youth initiatives, focusing on infrastructure development, promoting green initiatives, promoting digitization and ease of doing business, to take India towards a USD 10 trillion economy. Hon’ble Minster was quoted saying

“Our vision for the ‘Amrit Kaal’ includes a technology-driven and knowledge-based economy, with strong public finances and a robust financial sector. To achieve this ‘jan-bhaagidari’ (public participation) through ‘sabka saath, sabka prayas’ (efforts by all) is essential,”

On the macro front, the budget sticks to fiscal glide path with a target fiscal deficit of 5.9% in FY 23, and hopes to propel the growth aspirations with increased capital outlay by 33%, increased allocation to infrastructure.

The increased allocation of funds for Capital Investment will spur overall development. The focus on Innovation in Pharma, creating labs for 5G services, skill development for the youth keeping the industry needs in mind, creating the centre of Excellence for AI, etc. will create the backbone for the growth of the industry and a welcome move. On the ease of doing business front, it proposes – reduction in compliances, decriminalization of some provisions, and use of PAN as a common business identifier for all digital systems.

Till date the Government of India (GOI) has taken several initiatives to increase the tax base and improve tax compliance in the country. Some of these initiatives are E-filing of taxes, PAN and Aadhar linking, GST e-invoicing, TDS and TCS etc. Operation Clean Money is also a major initiative by the government of India which help to identify individuals and businesses who have not filed their tax returns or are not paying their taxes as required by law. As per the Press release dated August 1, 2022, the total number of Income Tax Returns (“ITRs”) filed for AY 2022-23 increased to 5.83 crore as on August 31, 2022. Out of this 5.83 crore, ITRs filed for AY 2022-23, 50% of these are ITR-1 (2.93 crore), 11.5% are ITR-2 (67 lakh), 10.9% are ITR-3 (63.35 lakh), 26% are ITR-4 (1.54 crore), ITR-5 to 7 (5.5 lakh). While analysing this data, it is identified that only 38 % out of total 5.83 crore filled their respective returns under the head “Profits and Gains of Business and Profession”.

We have witnessed that most of the budget proposals are centred around modifying existing provisions and improving tax administration around existing tax payers. In recent years, the number of tax filers has grown at a fast pace, thanks to administrative steps and information sharing between the direct and indirect tax wings. At the 75th year of Independence, India’s taxpayer base continues to be abysmally small and so does the direct tax-GDP ratio, at less than 6%. Just 1% of the population pays income tax. Also, the tax structure is such that the rich among individuals and firms find it easier to save tax, than their low-income counterparts.

But the questions which arises here is that, are above number of tax payers enough to achieve medium to long term GDP growth plans, as still there is a very miniscule part of population which files their tax returns. In developed countries, roughly more than 50% of population is taxpaying as against less than 5% in India as on date.

It was felt that GST will help formalisation of transactions and hence the tax payment on such transactions will significantly increase from both direct and indirect tax stand point, however despite introduction of GST and steps such as demonetisation to curb black money, the cash transactions continues to dominate especially real estate, trade and politics!

This has been discussed at length at various forums that what are various steps which government shall take to increase tax payer base, various recommendations given by industry and subject matter experts.

In our view some of the recommendations that can assist Revenue to cover more ground to boost the number of taxpayers and so do the revenue can be as follows:

•  In November 2021, Annual Information Statement (AIS) was introduced by the Income Tax Department which comprises details of Information of TDS and TCS, Specified Financial Transactions (SFT), Tax Payment, Refund and demand, Other Information etc but it should be extended to cover the additional details viz. turnover as disclosed under GST, Exports & Imports done during the period etc.
•  Now a days UPI has made a major contribution to ushering in the digital payment revolution in India. In December 2022, UPI crossed 7.82 billion transactions worth INR 12.82 trillion. The GOI should prepare a mechanism to scrutinize these transactions using advance technologies and information systems to ear mark people or transactions which are crossing a particular threshold limits or indicate applicability of tax provisions.
• In case if any person has not obtained registration under GST law due to dealing in exempted goods & services or below threshold limit as prescribed under law, an effective mechanism should be in place where every relevant department should communicate among themselves to catch hold the defaulting person if any to widen the tax ambit.
• There shall be a seamless exchange of information between two taxation boards in India i.e. Central Board of Direct Taxes and Central Board of Excise and Customs. Every assessment or enquiry which potentially throws certain information which may be useful for other tax authorities shall be shared. One of the example can be when input tax credit is disallowed by GST authorities owing to the reason that underlying transaction is personal in nature, the same shall be informed to the Income Tax department so that appropriate treatment can be accorded in income tax assessment as well. This may appear to be a small example, but there are many more scenarios which tax authorities can contemplate and create an information exchange ecosystem.
• Under GST law, an intelligence and investigative agency was formulated called Directorate General of GST Intelligence (DGGI) to deal with the matters relating to violation of the Goods & Services Tax, Central Excise Duty and Service Tax. It has been entrusted with the task of improving compliance of Indirect Tax laws. DGGI has detected tax frauds to the tune of more than INR 54,000 Crore during the Financial Year 2021-22 and recovered more than INR 21,000 Crore of such evaded tax and there is only upward trend seen in these figures till date. Interesting fact here is that a significant part of tax was recovered from transactions which were not reported at all. However, under Income tax provisions and administrative setup, there is no such agency with adequate infrastructure, technology and human resources which has been entrusted with a primarily task of uncovering tax evading transactions

However, recently there is positive traction seen in this regard in current Budget 2023. The Finance Bill, 2023 proposes to insert a new section 158A in the CGST Act so as to provide for prescribing manner and conditions for sharing of the information furnished by the registered person in his return or in his application of registration or in his statement of outward supplies, or the details uploaded by him for generation of electronic invoice or E-way bill or any other details, as may be prescribed, on the common portal with such other systems, as may be notified. The proposed Section also provides that the consent of supplier and recipient needs to be obtained for sharing the details. It further provides that no action can be taken against the Government or the common portal with respect to any liability arising consequent to information shared under this Section.

While we all agree that Sustained improvement in tax collections can translate into improved infrastructure, social services and quality of life. However it’s the government’s responsibility to strike a balance between ease of paying taxes and ensure a compliance environment. One of the very important aspects is that government shall consider increase in risk based audit and verification and increase the level of non-tolerance against the tax evasion; however this would be effective only when it is coupled with curb of corruption in government machinery.

While the world believes that Indian economy is poised for a strong economic growth, it would be interesting to see how much of that would be contributed by tax collections from strata of non taxpaying population as on current date.

Dive Deeper:
Highlights of the Finance Bill 2023
Income Tax Slab Rates for A.Y. 2024-25 | F.Y. 2023-24
Union Budget 2023-24 | 45+ Recommendations and Expectations