Direct tax is a type of progressive tax that is imposed upon a person or property as distinct from a tax imposed upon a transaction. Income tax corporate tax, property tax, inheritance tax and gift tax are its examples. In advanced countries, direct tax accounts for a major part of tax revenue. For instance in USA, more than 75% of total tax is received through direct tax. This percentage is 60% in case of UK and 50% in case of Japan. It has a limited scope in developing countries due to low per capita income and a huge gap between masses in terms of wealth accumulation and income.
India is one of those countries where direct tax accounts for less than 25% of total tax collection and it is decreasing steeply since independence. As per the official statistics, around 36% of the total tax in 1950-51 comes from direct tax which declined to 30% in 1960-61 and again to 19% in 1984-85.
Direct tax contributes to around 3.61% of GNP of 2014-15 whereas total tax to GDP ratio is 11.002 which clearly shows that direct tax share is significantly lower than indirect tax share.
While comparing this ratio to those of USA and China, this value comes out to be 10.577 and 9.87 respectively which can be assumed to be a significant figure because a large part of total tax in India is coming in the form of indirect tax, the burden of which will ultimately fall upon the general public of country.
Direct tax sources
Direct tax comes primarily from Government employees, business firms, shopkeepers, trusts, cooperative societies, AOP/BOI and others.
“Direct tax is one that cannot be shifted by the taxpayer to someone else unlike indirect tax.”
As against an estimated number of 4.2 crore persons engaged in organised sector employment, the number of individuals filing return against salary income is only 1.74 crores. As we can see that in contrast to the previous data, if we consider 5.6 crore informal sector individual enterprises and firms doing small business in India, the number of returns filed by this category is only 1.81 crore.
Out of the 13.94 lakh companies registered in India upto 31st March, 2014, 5.97 lakh companies have filed their returns for assessment year 2016-17. Of the 5.97 lakh companies which have filed their returns for assessment year 2016-17 so far, as many as 2.76 lakh companies have shown losses or zero income. 2.85 lakh companies have shown profit before tax of less than Rs1 crore; 28,667 companies have shown profit between Rs1 crore to Rs10 crore, and only 7,781 companies have profit before tax of more than Rs10 crores.
Among the 3.7 crore individuals who filed the tax returns in 2015-16, 99 lakh show income below the exemption limit of Rs 2.5 lakh p.a.; 1.95 crore show income between Rs 2.5 to Rs 5 lakh; 52 lakh show income between Rs 5 to Rs10 lakhs, and only 24 lakh people show income above Rs10 lakhs. Of the 76 lakh individual assessed who declare income above Rs 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh.
We can compare this with the fact that in the last five years, more than 1.25 crore cars have been sold and the number of Indian citizens who flew abroad, either for business or tourism is two crores in the year 2015. From all these figures we can conclude that we are largely a tax non-compliant society. The predominance of cash in the economy makes it possible for the people to evade their taxes. When too many people evade taxes, the burden of their share falls on those who are honest and compliant.
Income tax statistics
According to the income tax statistics in AY (assessment year 2014-15), only 3.91 crores fill their returns in an economy of 1.25 billion people which certainly raised some eyebrows. According to the Economic survey of India 2017, just 7 out of every hundred voters in India paid taxes .Only a handful of countries such as Mexico & Indonesia have fared worse than India in this regard.
Direct tax should be made elastic with respect to income along with the incorporation of an appropriate tax structure so per build in flexibility in budget. As the number of tax levels in India are less as compared to USA and China. India has only 3 tax levels with range (5% – 30%) whereas America has 7 levels with range (10% – 39.6%) and China also has 7 levels with range (3% – 45%) and are thus more tax compliant society than ours. Government needs to pay some attention toward this to bring more and more people in ambit of tax structure. Increase in share of direct tax will also help in reducing inflation as due to any increase in share of direct tax, government may think of reducing indirect tax (GST) which will ultimately help in price control of commodities. Demonetization is a tough process that is braced by India, whose motive was to curb black money accumulation but on the other hand, evading direct tax is a gateway for black money accumulation. So to give a meaning to demonetization this window of evading direct tax must be closed as soon as possible.
Planning commission report, Economic Survey of India, Income Tax Statistics 2014-2015, World Bank data