The data recently released by the government stating that only 1.25 cr Indian (individuals) pay income tax, that is, only 1%. It seems obvious to conclude that India is a nation of tax evaders! This sounds alarming and has excited the government so much that even PM chose to talk about it in his recent Man Ki Baat.
Before we get emotional about it, the matter deserves a little bit of analysis especially because we are increasing living in an extremely restrictive environment based on mistrust so much that even one government does not trust another government. This is a basic reason why India is not even targeting a Single GST but a Dual GST because state governments do not trust Central Government and vice versa. If a matter needs clearance of multiple government agencies/depts, each agency/dept will deal with it completely ignoring the findings of the other suspecting corruption or collusion by the others.
This has gone to an extent where each state has erected check-points on borders; imposed entry permits with hefty penalties and sometimes, even criminal action, for any entry of goods without proper entry permit. It is so strict that a truck goes from MP to Gujarat to make delivery, is rejected by the customer and comes back to MP. Even this truck needs a road permit for entering MP. It has to wait outside MP border and the MP businessman has to generate a road-permit and send to the border for the truck to be allowed entry into its home state with goods it loaded in its home state!
On income tax front, it is hard to imagine economic activity that does not require a PAN number except agriculture. The governments are hyper sensitive to revenue and are chasing it aggressively as the foremost consideration behind any activity (unless it fetches votes). There is an inevitable litigation for business which must go into multiple appeals Departmental appeals have become dysfunctional as the authorities operate both as prosecutor and Munsif simultaneously, and it is only at judiciary’s level that an impartial and fair application of law could be expected. Revenue officers carry designations as “magistrate” without any judicial training and hence, they do not even pretend to be impartial and fair. Governments are pushing businessmen into courts and have generated over 3 cr pendency that could take more than 300 yrs to clear! Enormous national resources are locked up in courts that will take infinity to clear.
Now, let us try to analyze the data roughly. Please consider the followings:-
1. India’s per capita income is Rs.93,231 as per last economic survey. This includes even corporate income divided by the entire population. Since small number of promoters get bulk of the corporate incomes, its average could be misleading. Hence, a representative income in the hands of individuals could be at least 25 to 30% lower. Let us assume, a representative per capita income in the hands of individuals is Rs 80,000/-
2. There is no income tax upto Rs 250,000 and there are certain deductions u/s 80C which can be assumed to be availed by every income tax payer (being life insurance, provident fund, home loan repayment etc). Thus, broadly speaking, there should be no tax liability upto an income of Rs 400,000/-.
3. 40.6% individuals are within 24-54 yrs age group. Since real data of this age group are not available, let us assume those within the age group of 24-60 yrs are about 60%. Let us also assume that that those outside this age group are not earners. Those below are students and those above, are retired.
4. 50% of these 60% people are engaged in agriculture which is outside the scope of income tax.
5. Half of these 50% of 60% people are women, mostly housewives or even maids in domestic employment whose incomes may not be computed in per capita income and insignificant for income tax purposes. This leaves about 15% people who could be subjected to income tax.
6. Average income of these 15% people is Rs 80,000/15%= Rs 533,333/-. Out of this Rs 400,000 could be deemed to be exempt, leaving taxable income of Rs 133,333/-. Total income tax revenue to be expected from this should be Rs. 133,333*10% (tax rate)*1.03% (education cess) = Rs.13,733 per head, say Rs 14,000 per head x 124 cr x 15% = Rs. 260,400 cr.
7. Actual income tax collection from individuals during 2015-16 was Rs.327,367/- cr (revised budget 2015-16).
From the above back of envelope calculations, it does not appear that India is a nation of tax evaders. Yes, it is not as affluent us some of us might want to believe. It is still a poor country with per capita income of below $2000 when world’s average per capita income is about $10,000/-. How could a nation managing just about 20% of the whole humanity’s per capita income could hope to be affluent and expect to be income tax payers, meaning, deriving income substantial enough to be taxable?
But of course, income from illegitimate sources is definitely escaping tax net. Nobody pays income tax on bribes or smuggling or prostitution or drug business or black marketing of liquor in dry states and so on. Here the primary question is not loss of revenue to the government, but curbing such illegitimate sources altogether. The governments will be well advised to curb these activities and work towards improving national productivity and free up the resources to make India prosperous, rather than lament about small number of individual income tax payers.