Our shrinking base of mid-income taxpayers

Last month, the government released data in the Lok Sabha on the number of individual taxpayers by three income bands: up to ₹5 lakh, ₹5-10 lakh, and above ₹10 lakh. The total taxpayers rose from 40 million in 2015-16 to 65.4 million in 2018-19, reflecting an overall expansion of the taxpayer base. In 2020-21, however, this fell to 63.3 million.

The share of those earning up to ₹5 lakh a year had started to decline even before the pandemic—from an 81% share in total in 2014-15 to 76% in 2018-19. In 2020-21, this fell to 65%. Post-covid, the decline was also in absolute terms. Thus, the shrinking of the lowest tax brackets dramatically worsened due to economic disruptions caused by covid.

As incomes rise, taxpayers move up income slabs. But another major reason for these shifts is greater income inequality. The pandemic has exacerbated an existing divide between rich and poor, shows an ICE360 survey of about 120,000 urban households across 100 districts.

Of the five income bands, the three lowest bands saw their mean household income fall between 2015-16 and 2020-21. In contrast, the richest 20% saw a 39% increase in income.

Pre-pandemic Trend

Driven by this top end, over these five years, average income among direct tax payers rose 8.4% to ₹3.23 lakh per annum. While the pandemic made things worse, the income share of taxpayers in the lowest tax bracket (up to ₹5 lakh) was falling even before the pandemic, from 44% in 2013-14 to 33% in 2018-19. Meanwhile, the share of the other two brackets (above ₹5 lakh) in the overall income rose by the same amount.

One reason why people at the top are earning more could also be diversity of income. The non-salary income component of the higher-income bracket has increased over the years, but decreased for the lower-income bracket. Demonetization, the migration to goods and services tax (GST) regime (which disproportionately hit smaller firms employing lower- and middle-income workers) and the pandemic all combined to pare down the relative position of middle-class Indians in the income pie.

Less Secure

The salaried middle class forms the backbone of the urban economy. Yet, as the government’s Periodic Labour Force Survey shows, the proportion of workers in urban India who are salaried has declined since the pandemic, from 48.8% in 2019-20 to 46.4% in 2020-21. Across both rural and urban areas, the share of salaried workers fell from 23.8% in 2018-19 to 22.9% in 2019-20 and further to 21.1% in 2020-21.

Women were affected more. While the proportion of male workers who were salaried fell by 1.9 percentage points, the decline for women was 4.1 percentage points over the same period. At the same, ‘informalization’ and casualization of the workforce increased. The proportion of casual labour in the workforce has risen from 13.4% in 2019-20 to 14.1% in 2020-21 in urban India, suggesting that lower-income groups shifted to informal employment due to a severe job crunch during and after the pandemic.

Corporate Impact

The shifts in income structure of the Indian consumer has far-reaching, longer-term implications for the economy. Internet businesses is one place where this plays out. Firms like Zomato, Swiggy, MakeMyTrip, Naukri, and Paisabazaar are essentially relying on their consumer base to grow as a result of more people entering the formal workforce and moving up in it.

But if the middle-income category, which forms a majority of the urban household population, is not growing at a brisk rate, then such companies will find it difficult to expand beyond a point. The tapering in the average monthly transacting user base of food-delivery company Zomato points to the challenges of maintaining growth. Increasing inequality and a bleak overall employment market, with people leaving the formal workforce, is a conundrum that the economy is yet to solve.

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