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Where are India’s taxpayers?
November, 23rd 2016

Only 2.9 crore Indians filed personal income tax returns for the assessment year 2012-13 — that is less than 4 per cent of the 760 million adults enumerated in the 2011 Census. More than half these 2.9 crore individuals paid no tax at all. That the country’s direct tax base is dizzyingly narrow is an often stated problem. But >data put out on Friday by the Income Tax Department provide details to frame the challenge yet more sharply. This includes time series data from 2001-10 to 2014-15; of particular value are the income tax return statistics that the department has posted on its website. For now only the details of the assessment year 2012-13 are available. This is a long overdue first step in encouraging, as the department has stated, “wider use and analysis of income tax data by departmental personnel as well as various stakeholders including economists, scholars, students, researchers and academicians for purposes of tax policy formulation and revenue forecasting”. The data will be duly mined, but in broad brushes they paint a disturbing profile of India’s political economy. Due to the failure in bringing enough well-off Indians into the direct tax net, the country has been mobilising revenue through indirect tax collection. In 2015-16, direct taxes contributed only 51 per cent of the tax revenue, lower than in recent years (and even the government’s expectations) and the lowest since 2007-08. An increasing share of indirect taxes in total revenue collection is cause for alarm because indirect taxes affect all Indians alike, rich and poor. Indeed, given that the poor generally spend a greater fraction of their income on essentials than the rich do, with wider indirect taxation, they end up paying a higher individual tax rate than people considerably wealthier. For a start, therefore, the time series data should nudge policymakers to reframe tax governance priorities and rejig the direct-indirect tax ratio more equitably and progressively.

It is not just that indirect taxation needs to be rationalised. It is clear from the income tax return statistics that direct taxes continue to be evaded in substantial measure. Consider, for example, that just 18,358 individuals declared incomes of over Rs.1 crore in 2012-13, and that 1.5 per cent of taxpayers accounted for over half the personal taxes due. These numbers do not square up with sales of luxury cars, high-end accessories, gold and real estate. As stressed in the Centre’s Economic Survey this year, taxation is a core element of modern citizenship in democracies. India may have chosen taxation as citizens’ central obligation, but its direct tax revenue base is too narrow — an uncomfortable position for an economy steadfastly trying to scale up social and infrastructure investments while maintaining a semblance of fiscal discipline. The government needs to push through meaningful reform like taxing large farm incomes and rationalising bounties enjoyed by the well-off, to widen the base. Most importantly, however, it needs to match the databases already available to prevent tax evasion, something that only needs political will.

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