How a small tax-paying elite funds the Indian state4 min read . Updated: 30 Jul 2019, 09:03 PM IST
The top 1% individual taxpayers contribute nearly one-third of India’s taxes, while the top 5% contribute nearly two-thirds of all the taxes collected
The move to raise surcharges on the incomes of India’s super-rich taxpayers has led to a barrage of criticism from tax experts who have questioned such ‘soak-the-rich’ policies. The finance ministry has justified this decision on the grounds of equity.
While much of the discussion on this issue has focused on foreign portfolio investors, some of whom have been hit by this move, what has eluded attention is that the so-called ‘super-rich’ are also the primary contributors to the Indian state’s treasury. Despite a very low percentage of tax filers falling in the highest tax liability brackets, the lion’s share of direct tax revenues comes from a small pool of rich taxpayers, a Mint analysis of the tax returns data published by the income tax department shows.
For instance, those with incomes between ₹2 crore and ₹5 crore (those affected by the new surcharge) and hence in the tax liability brackets of ₹69 lakh to ₹1.8 crore accounted for about 0.1% of the effective personal income tax base (excluding those paying zero taxes). But taxpayer data for assessment year 2017-18 shows that this tiny group contributed 13% to the overall personal income tax collection in that year.
The analysis also shows that the top 5% of effective tax-payers in the country, equivalent to 0.1% of the country’s population, contribute nearly three-fifths of India’s income tax collections. And the top 1% of effective tax-payers, equivalent to 0.03% of the country’s population, contribute roughly a third of India’s income-tax collections.
If India’s personal income tax base is heavily skewed towards the top income earners, its corporate income tax base is even more so. Just the top 5% of tax-paying firms (based on taxes paid) contribute about 95% of the total corporate tax collections.
Going after this small class of big tax-payers (who are already contributing large shares of tax revenue) is an easy way for the government to raise tax collections but beyond a point, the government risks alienating the very class that sustains the Indian state.
Besides, the data does not suggest any urgent need to squeeze higher taxes from a small tax-paying class. Despite a small and narrow tax base, India’s tax collections appear respectable when compared to economies with similar levels of per-capita income, as these pages have pointed out earlier. India appears an outlier in terms of tax collections only when compared to large economies of the world, which are far richer than India in per-capita terms.
In fact, India’s personal income tax collection as a share of its GDP, at 2.5%, is higher than that of countries such as Vietnam, Bangladesh and Egypt and comparable to that of the Philippines. India also does not fare badly when compared to its Asian peers.
India’s limitation lies in its small tax base. As these pages have pointed out earlier , only around 7.4% of adults (aged 15 years and above) in India file or pay income tax. This is much lower than developing countries with similar per capita income, such as the Philippines (26%) and Vietnam (58%). The fact that India still collects as much taxes (as a percentage of GDP) as those economies suggests that India’s tax structure is heavily skewed.
In terms of corporate tax collections, India’s collections (3.3% of GDP) is slightly smaller compared to comparable economies such as Vietnam (3.8%), Bhutan (6.4%), and the Philippines (4.3%). This is despite the fact that India’s statutory corporate tax rate, according to OECD data, is among the highest in the world, suggesting that there is a wide gulf between statutory and effective tax rates in the country.
The skewness in both income and corporate tax base could partly reflect inequality in incomes. But they also arise from numerous exemptions and because of weak administration and evasion. Rather than initiate systemic reforms to correct these anomalies, the government has resorted to aggressive tax demands (such as the ill-fated angel tax) or adventurist policy moves (such as demonetization) to fix the problem. Unsurprisingly, such moves have not led to a sustained rise in the tax base.
Meanwhile, systemic reforms in tax administration remain pending. A 2017 Comptroller and Auditor General of India audit found that the number of non-filers identified by the Directorate of Systems under Non-filers Monitoring System has grown more than five times between 2013 and 2017 to 6.75 million in 2017.
The report highlighted “persistent" and “pervasive" irregularities including those relating to errors in computation of income and tax, mistakes in levy of interest, and instances of incorrect allowance of business expenditure in assessing tax cases. Such under-assessment led to a total revenue loss of ₹28,843 crore in fiscal 2017. The report blamed the structural and institutional weaknesses of revenue-collecting agencies for the loss.
Such institutions are strongest in countries with well laid down norms of transparency and accountability, according to recent research by Tania Masi of the University of Milano-Bicocca and others. The researchers cite poor administration as a major reason for low tax collections in developing countries. Placing institutional constraints on the executive powers of authorities managing public finances can significantly improve tax collections by bringing in greater transparency and accountability in tax transactions.