A Parliamentary Standing Committee has strongly criticised the Income Tax Department's refusal to bifurcate business and individual income under Personal Income Tax (PIT), citing it as a major hurdle in understanding true income patterns and framing effective tax policies.
The committee, in its recent report, reiterated its demand for a detailed action plan with clear milestones and timelines to segregate income data, especially since a significant portion of non-corporate business income-estimated at Rs 1.5 lakh crore is currently included under PIT, alongside individual income.
"The current structure distorts the real picture of income distribution and hampers the formulation of targeted tax policies," the committee noted.
Concerns Over Distorted Tax Data
The issue of commingled PIT data has long been debated, especially after reports suggested that PIT collections have at times surpassed corporate tax collections, raising concerns about the accuracy of such comparisons. The committee emphasized that without segregated data, it becomes difficult to:
- Understand the actual contribution of individuals vs non-corporate businesses
- Identify areas of potential tax evasion
- Address specific needs of different taxpayer categories
"Separate classification would enable more nuanced policy formulation and compliance monitoring," the committee stated.
Ministry Terms Segregation 'Not Feasible'
In its action taken report, the Ministry of Finance (Department of Revenue) defended the current tax classification system. It noted that direct taxes are broadly divided into Corporate Income Tax (CIT) and Personal Income Tax (PIT), the latter encompassing individuals, HUFs, partnerships and other non-corporate entities.
The Ministry further argued that although taxpayers use different ITR forms-like ITR-1 and ITR-2 for individuals with no business income, and ITR-3, ITR-4, and ITR-5 for those with business income or other entities-the returns are not structured to allow head-wise segregation (i.e., income from salary, business, capital gains, etc.).
Panel Finds Ministry's Response 'Unsatisfactory'
Unimpressed by the response, the committee called it "less than satisfactory", stating that it fails to address the core objective of the recommendation.
"Given that all income tax data is now digitized, there is ample opportunity to leverage technology and structured data to generate a clearer picture," the committee said.
It emphasized that while it wasn't suggesting a specific methodology, the government should utilize existing digital infrastructure to enable more refined classification and reporting of income data.
Call for Action Plan
The committee has now reiterated its recommendation and asked the Ministry to furnish a concrete action plan, outlining how and when it plans to achieve PIT data segregation.
"The Ministry must explore avenues and mechanisms to segregate PIT data and submit a detailed roadmap with defined milestones in the next action taken statement," the report concluded.
The demand for granular income classification is expected to gain momentum as policymakers, economists, and tax analysts continue to seek greater transparency and accuracy in India's tax reporting framework.
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