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Budget 2020 is just two days away and expectations of income tax breaks for salaried Indians are at their peak. An economic slowdown that needs a consumption boost warrants tax cuts that will leave more in the hands of the taxpayers, but did you know that less than 3% of Indians paid income tax in assessment year (AY) 2018-19? The average tax paid by these taxpayers was 2.3 lakh, according to the income tax department.

Further, out of the total return filers who paid tax, just 1% account for 70% of the total tax paid, indicating that high income earners contribute to the bulk of taxes paid. Little wonder then that the tax incidence on higher income groups has only been increasing in the past years.

Budget 2019 levied a surcharge of 25% on those earning between 2 crore and 5 crore, whereas those earning over 5 crore pay 37% as surcharge on the tax amount. Effectively, for these income groups, the tax rates increased to 39% and 42.74%, respectively.

But this may still not bring home considerable gains if a huge chunk of the population still sits outside the tax net. For instance, a tiny 77 individuals who earn more than 100 crore as gross income filed income tax returns (ITR). This included three individuals who earn more than 500 crore as gross income during AY19. In fact, just nine salaried individuals filed a tax return of more than 100 crore during AY19. Clearly, the rich in India are still outside the income tax net.

Tax truth
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Tax truth

The PAN-Aadhaar linkage, however, should improve these numbers as it is expected to bring more people under the income tax net. More than 430 million PANs were allotted till 31 March 2019. Out of this, 62.84% were allotted to males, 37.16% to females and 0.001% to transgenders, said income tax department’s data. The number of those on board Aadhaar is nearly 1.25 billion or 91.35% of the population, according to data from the Unique Identification Authority Of India (UIDAI).

But those with lower salaries have benefitted in terms of tax liability over the years. Nearly 72% of the total ITR filed in AY19 had gross total income between 2.5 lakh and 9.5 lakh. Over the past 10 years, the tax incidence on this income band has gone down, whereas it has gone up for high income earners. Sadly, there aren’t enough at the top who file taxes even as they end up paying a huge chunk of the taxes. The government, therefore, needs to focus on bringing more high income earners into the tax net.

The government may have some elbow room to please the middle class, given that the tax paid by it forms only a small percentage of the total tax collected, but any meaningful impact would be seen only when the government manages to bring more people under the tax net. Otherwise, while the tax incidence may go on decreasing for the middle class, it will go on increasing on the same set of super rich who are already paying taxes.

The problem that the Indian budget faces is of not enough people paying the taxes they should and a disproportionate burden falling on those who do. Most measures tried by governments across the years have failed to see a dramatic increase in the number of taxpayers or the quantum of tax paid. Some commentators believe that it is only a cash transaction tax that has the capacity to fix this problem and suggest that such a tax will hit those who make high-value purchases more, taking care of the issue of equity and the need for a progressive tax system.

Whatever the way forward, it does remain to be seen if Budget 2020 will make wealth creation even more difficult than the previous budgets and whether it will continue with attempts to squeeze the rich even more.

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