No, Two States did not Pay 53% Tax

Income Tax Department released some interesting dataset for AY 12-13 yesterday aggregating key numbers from IT Returns. My analysis is available here.

Today, you may have woken upto reports how 2 states paid 53% of total Income Tax collection, with Maharashtra alone accounting for over 39%. This blog seeks to put that misleading statistic to rest.

Under Income Tax law, profits are taxed where the assessee earns them. For corprates, this means the place where 'control' resides. In practice, corporate tax gets accounted where the registered office is.

So Reliance Industries generates cash in Gujarat and off-Andhra coast. However, since the Registered Office is in Mumbai, the tax payments are recorded as collected in Mumbai.

Tata Steel and Tata Motors generate profits in, inter alia, Jharkhand. So do Coal India, SAIL and many more. When these corporates pay taxes, do the taxes get counted as collection from Jharkhand? No!

Banks earn profits (when they do!) through their branch network lending across the length and breadth of the country. But most Banks are headquartered in Mumbai, as are most other large corporates, so Maharashtra gets credit for tax collection.

Many PSUs are headquartered in New Delhi. Their earnings in other places get reflected in tax collection from New Delhi, creating the mistaken appearance of it being the second-largest taxpaying state.

This misreporting, or atleast misleading reporting, does not impact states. Income Tax is a Central levy and while revenue is shared with States, collection from state does not affect a State's share. 

Earlier, collection from state was a factor that affected a State's share in Central tax collection, but that practicee was discontinued by the Tenth Finance Commission.

Now, Taxes collected by Centre are shared on the basis of demographics, poverty (distance from mean) etc.

Yet, the raw data contiues to mislead. Mumbaikars love to crib how they pay lion's share of Income Tax.

I would welcome more data that seggregates Place-of-Income better. That would give us a better picture of which is paying how much. Suffice to say at this juncture that data aggregation as reported by media is hopelessly misleading.