Why so few Indian's pay Income-Tax..... an Insight

Very few Indians pay Income-Tax. Do Indian’s evade taxes and hide their incomes is the popular notion?? But this is a big myth….. Are taxes very high in India? or is the widening ambit of GST creating such an impression... a global comparison shows there are many countries where rates of indirect tax and personal income tax are much higher, but exemption slab system is different.

According to the latest Income tax rules laid out by the Finance Minister in her Union budget, only people earning more than Rs 5 lakh will effectively pay Income tax. According to the government’s Economic Survey of 2020, India’s per capita income is Rs 1.4 lakh. The average Indian earns Rs 1.4 lakh a year. We know the income tax threshold limit is Rs 5 lakh.  Now, how many Indians earn more than Rs 5 lakh to qualify to pay income tax ? Which means, the average Indian is not required to pay any Income tax.

Lets make a global assessment and look at other countries. The average American, who “earns the same as America’s per capita income”, has to pay 22% Income tax. Similarly, the average Chinese pays 10%, the average Mexican pays 15%, the average German pays 14%. Almost every other country has an Income tax limit, that is below the average income of it’s people. Only India and Bangladesh have Income tax limits that are much higher than the average income.

Data shows India’s taxpayer’s inequality, we estimate that only 3% of working Indians earn, three times the average per capita income. (That is, only 3% of Indians earn more than Rs 5 lakh.) This is comparable to other countries>> Only 5% of Americans earn 3 times their average income, 4% of British and roughly 3% of Chinese. This proves that only 3% of Indians are even qualified to pay income tax. Hence India has a very low income tax base.

So, if we believe India’s GDP, economic, and income data, possibility may be that there are tax evaders and black money holders in India. Even if money out of tax net is used to buy goods, gold, real estate, and other things; this is then captured in GDP data and reflected in the per-capita income in coming years. It is not possible that millions of people have hidden cash for many years without ever using them and keeping this money out of circulation. Even if they did, it gets reflected in RBI’s money supply data. This myth that India has a low income tax base, because millions of Indians hide their income has led to some catastrophic decisions and created a climate of dis-trust and suspicion of citizens by the income tax department.

India has very few taxpayers, not because millions of them are hiding their incomes and evading taxes. It is because India’s income tax structure is designed in a way that brings only small percentage of people to pay Income-Tax. So, it is evident that, millions of people are not hiding their incomes in a secret corner, but because for a poor country such as India, the income tax basic exemption limit is high and so automatically most of Indians fall out of the tax bracket, hence creating a burden on higher earning Individuals or Corporates.

contributed by :

CA Yogesh Birla

Director
Birla WP Management
visit us at : www.YogeshBirlaCA.Blogspot.com