An expanded list of high-value purchases issued this week – from watches to art – that will be subject to 1% TCS is designed to curb I-T evasion. Luxury consumption provides the taxman with markers for underreported income in an economy where wealth creation is speeding up. There is evidence suggesting that India’s richest cohort reports low income relative to their wealth, thereby distorting the picture of economic inequity. India also finds itself in unfamiliar public finance territory, with its minimum I-T threshold now considerably higher than the per-capita income. This leads to overdependence on indirect taxes, which typically do not serve the purpose of progressive taxation.I-T lacks the built-in self-policing features of value-added taxes, such as GST. However, enhancements in reporting requirements and supporting data-driven vigilance contribute to revenue mobilisation. Additional features, such as tax deductions at sources of income and consumption, deter widespread revenue leakage, but these gains are limited by the pace of formalisation of the economy. Large parts of income and consumption remain beyond the scope of tax reporting, and there is a risk that higher reporting requirements could push more of it into informal channels. The experience with tracking consumption has been mixed. Tax collected at source on high-value car purchases has had some impact on sales growth. However, when the list is expanded to include luxury items of the same ticket size, there is a risk that sales could shift to grey channels.India’s recovery from recent economic shocks has been led by consumption from the top layer of income earners. A tax regime that becomes overly inquisitive – at least on the surface – could dampen high-value consumption. Offsetting this with consumption by those lower in the pyramid involves significant wealth redistribution. Efforts to track underreporting of income at the point of generation could yield better outcomes than correlating income with consumption.
