Decoding the great Indian taxpayer

A small portion of India’s salaried population pays the bulk of its individual income tax, which gets redistributed to others and doesn’t benefit the taxpayers that much. In the process, it drives them away from the Indian state. At least, that’s the feeling going around.

In this regard, the Economic Survey of 2015-16 pointed out: “If the state’s role is predominantly redistribution, the middle class will seek—in professor Albert Hirschman’s famous terminology—to exit from the state. They will avoid or minimize paying taxes; they will cocoon themselves in gated communities; they will use diesel generators to obtain power; they will go to private hospitals and send their children to private education institutions."

While everything in the above paragraph is true, the ability to exit from the state doesn’t entirely hold. The salaried class hasn’t been able to avoid or minimize paying taxes, or so the data suggests.

The income tax department puts out detailed data on tax return filers every year. It has been doing this from assessment year 2012-13, or AY13, onwards. The data for AY19 was recently published. AY19 deals with the income earned during fiscal year 2017-18, or FY18, (i.e. the period between April 2017 and March 2018).

The data provides a number of interesting insights about the nature and profile of the great Indian taxpayer. According to the data, only around ₹37,400 crore is generated as income from house property in a year (through rents after adjusting for home loan interest, etc.) in the entire country, which shows that much of these transactions are still cash-based and completely outside the tax net. The declared salary income, however, is more than twice the size of the declared individual business income, which puts a wrench in the theory about the exit of the salaried middle class.

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■ When it comes to individual income tax, different kinds of income is taxed. This includes salaried income, income from house property, business income, and interest income. The total income declared by individuals during AY19 stood at ₹34.1 trillion. Of this ₹20 trillion, or the bulk of the income, was declared by the salaried class.

The business income came in next at ₹9.3 trillion. The declared interest income was ₹1.19 trillion, whereas the income from house property stood at ₹37,448 crore.

Further, a huge jump in the income declared by the salaried class has essentially been responsible for the overall increase in individual income tax earned by the government over the years.

The salaried income declared jumped from ₹6.27 trillion in AY13 to ₹20 trillion in AY19, an increase of 220%. On the other hand, the business income declared during the same period has jumped from ₹4.1 trillion to ₹9.3 trillion, an increase of around 127%.

In AY13, the number of salaried income tax returns had stood at around 11.7 million. By AY19, this had jumped to 29 million. In case of business income returns, the number had jumped from 15.3 million to 22.5 million (see chart 1).

The interesting thing is that during the demonetization year, AY18 (FY17), the number of business income returns actually fell. Also, it is worth noting here that during the Narendra Modi era (i.e. since FY15 or AY16), the number of business income returns has barely grown from 19.4 million to 22.5 million. In comparison, the number of salaried income returns has grown from 18.9 million to 29 million.

What does this tell us? It tells us either that the businessmen are not filing returns or that many businesses have simply become unviable post 2016. Also, it is the salaried who are driving the individual income tax. They clearly haven’t exited the state.

The average salary income declared in AY19 stood at ₹6.9 lakh, which was 67% more than the average declared business income of ₹4.13 lakh. This can possibly mean only either of two things: entrepreneurship is not as remunerative as it is made out to be. Or, the average businessman still operates largely in cash and, hence, does not declare his fair share of income (remember in AY19, we are basically talking about income earned in FY18, the year right after demonetization).

The average salaried income has, in the meantime, increased by just 4.5% per year for the period under consideration (see chart 2). This offers another explanation for the current consumption slowdown. Income growth for the salaried class has collapsed. In fact, it has barely moved post demonetization. The income tax data clearly shows that. On the other hand, the average business income has increased by around 7.2% per year, though it has also stagnated post demonetization and the shoddy implementation of the goods and services tax (GST). Even the income tax data shows very clearly what the government doesn’t want to admit.

■ There has been a lot of talk about the increase in the income tax collected post demonetization. Is that true? And how does it look in comparison to the overall economy? As can be seen from chart 3, the individual income tax to gross domestic product (GDP) ratio has been rising. The interesting thing here is that the best increase in the individual income tax to GDP ratio was in the AY17 (FY16), in the fiscal before demonetization and also much before GST was implemented. The increase in the post-demonetization years has been nothing extraordinary in comparison to the increase in the pre-demonetization years. The individual income tax collected has moved up in a more or less usual trend. So, what impact did demonetization really have is a question well worth asking.

■ The Economic Survey of 2015-16 had stated: “For the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4% of citizens who vote pay taxes, the percentage should be about 23."

The point is a minuscule portion of Indians actually pays the bulk of India’s individual income taxes. But you will be surprised to know how small the number actually is. It is those who pay an income tax of above ₹1.5 lakh who actually pay the bulk of the income tax paid by individuals (see chart 4).

In AY13, individuals paying an income tax of greater than ₹1.5 lakh accounted for nearly 79% of the total tax. This figure fell to 74% in AY15. It has since risen to 79.1% in AY19. A possible explanation for this lies in the higher surcharges that the government has introduced for those in the higher tax brackets over the last few years.

The number of people paying taxes of greater than ₹1.5 lakh is minuscule as a percentage of the overall population.

The number of people paying an individual income tax of greater than ₹1.5 lakh has increased from 1.38 million in AY13 to 3.49 million in AY19. Nevertheless, as a percentage of the population, this remains a very small proportion. In AY19, 0.26% of the population paid close to four-fifths of the individual income tax, against 0.11% in AY13.

If you happen to belong to this group, you might really feel that you have a good portion of the burden of the nation on your shoulders. Of course, this is good enough reason for the government to start taxing agricultural income over a certain level. Given that the bulk of the tax is paid by a small proportion of the population, there is always talk going around about doing away with the income tax at lower income levels. But the question is can the government really afford to do this?

The total taxes paid by those paying a tax of up to ₹1.5 lakh in AY19 stood at ₹66,272 crore. It was at ₹23,551 crore in AY13. In AY13, it formed around 21% of the total taxes paid by individuals. In AY19, it was at 20.9%.

The point being that the government earns a significant portion of the income taxes paid by individuals through those paying an income tax of up to ₹1.5 lakh. So, when it comes to income tax, there is fortune for the government at the bottom of the pyramid. This explains why the income tax brackets have largely remained unchanged over the last few years.

■ A bulk of the people who file income tax returns do not pay any income tax. They just file returns. But things have changed for the better between AY13 and AY19. In AY13, only 43.6% of the income tax return filers paid income tax. In AY19 this had jumped to 59.5%.

One reason for this lies in the fact that as people earn more over the years, they start paying tax or paying tax at a higher rate. Also, as we have seen, there has been a great jump in the income tax returns filed by the salaried individuals, and that has possibly led to a great proportion of filers paying taxes. This again tells us that the salaried class continues to bear the bulk of the burden of the individual income tax. This becomes even more clearer after we look at the data for the income earned from house property.

In AY19, around 8.3 million individual returns were filed for house property income. Of these, around 4.67 million declared a negative income from house property. This basically means that they are repaying their home loans. An interest of a maximum of ₹2 lakh paid on a home loan(s) is currently allowed as a deduction from taxable income during a year. Hence, around 3.63 million filers actually made a positive income from house property.

If I were to put it a tad simplistically, India has just 3.63 million landlords. This is extremely difficult to believe. It again tells us that renting a home is one area where cash transactions continue to thrive. And that’s where the problem is.

Vivek Kaul is an economist and the author of the Easy Money trilogy.