Here is Another Good Joke: Latest Income Tax Data Suggests India Has Just 23.7 Lakh Landlords

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In yesterday’s column, I had explained how only a minuscule portion of India’s population pays a bulk of the personal income tax collected by the government.

This conclusion was drawn based on the detailed income tax data for the assessment years 2013-2014 and 2014-2015, recently released by the government. The income tax returns for the income earned during the financial years 2012-2013 and 2013-2014 were filed during the assessment years 2013-2014 and 2014-2015, respectively.

In late April, earlier this year, the government had released income tax data for the assessment year 2012-2013. Based on this data some interesting observations can be made. In today’s piece, I will look at income from house property declared by Indian taxpayers.

Let’s look at Figure 1. It has details regarding individuals who declared a positive income from house property. Income from house property can also be negative.

Those declaring a negative income from house property would include individuals who have taken on a home loan. Interest paid on a home loan is allowed as a deduction against taxable income within a certain limit, on self-occupied property.

For the assessment years under consideration an interest of up to Rs. 1.5 lakh paid on a home loan could have been taken as a deduction against taxable income.

But that is not of importance in this piece. What we are considering here are taxpayers who are making some money from the homes that they own. These taxpayers are essentially landlords who own homes, rent them out and make money in the process.

 

Figure 1:

Assessment YearNumber of individualsTotal Income declared (in Rs. Crore)Average Income (in Rs.)
2012-201319,95,73933,2771,66,740
2013-201421,87,01739,4981,80,602
2014-201523,66,52745,8991,93,951

Source: Author’s calculations based on data released by the Ministry of Finance.

As per the income tax records, in the assessment year 2014-2015, the total number of landlords in the country stood at around 23.66 lakh. Of course, this number included those showing a notional rent for tax purposes as well.

In the assessment year 2012-2013, the total number of landlords had stood at 19.95 lakh. This means a jump of 18.6 per cent over a two-year period. The average rent collected in assessment year 2014-2015, was at Rs. 1.94 lakh against Rs. 1.67 lakh in assessment year 2012-2013.

The average as usual hide the details. In the assessment year 2014-2015, more than 15.8 lakh individuals declared an average income of Rs. 66,000 from house property during the year. This works out to a monthly income of Rs. 5,500. Or this is the amount that these individuals made every month by renting out their homes.

In the assessment year 2012-2013, more than 14.55 lakh individuals had declared an average income of Rs. 60,000 per year. This works out to a monthly income of Rs. 5,000. Hence, it is safe to say that as per income tax records, the average landlord in the country earned a monthly income of Rs. 5,500 during the assessment year 2014-2015.

This figure seems to be low and out of place with the prevailing rents.  People paying income tax primarily live in the big cities and such a low rent in a big city is practically unheard of.

Also, the total number of landlords in the assessment year 2014-2015 stood at 23.66 lakh. This is an extremely low number. As Arjun Kumar writes in a research paper titled India’s Residential Rental Housing: “More than one-tenth (11.1%) of the households in India lived in rented houses in 2011, and, in this respect, there was a heavy bias towards the urban sector. Almost four-fifths of the total households living in rented houses in India (27.4 million) were in urban sector (21.7 million). Overall, the proportion of households living in rented houses was 3.4% and 27.5% in rural and urban sectors, respectively.

Hence, the total number of rented houses in the country as per the 2011 Census stood at 27.4 million or 274 lakh. In urban India, the number stood at 21.7 million or 217 lakh. Now compare this to the fact that only 23.7 lakh individuals in the assessment year 2014-2015 declared income from house property. This clearly tells us that many landlords are essentially not declaring the income that they earn from their homes.

It further means that rents are being paid in cash and in the process the total amount of black money in the country has gone up. What is also noteworthy is that Census 2011 numbers are now more than half a decade old. The total number of rental households would have only gone up since then.

In fact, as Kumar writes: “The number of households living in rented houses in India increased by 7.1 million (35.3%), from 20.2 million in 2001 to 27.4 million in 2011. The rate of growth in the number of rented households was higher than that of the growth rate of total number of households (28.5%) in India.” There is no reason for this trend to have changed since 2011.

To conclude, when we talk about the black money problem that prevails in the country we tend to talk about the buying and selling of real estate as being a major reason. Nevertheless, the data clearly suggests that rental income is also a major part of the black money problem.

The column originally appeared in Vivek Kaul’s Diary on November 3, 2016

 

0.15 Per Cent of India’s Population Pays 77% of Its Personal Income Tax

rupee

A few days before Diwali, the Ministry of Finance released detailed income tax data for the assessment years 2013-2014 and 2014-2015. The income tax returns for the income earned during the financial years 2012-2013 and 2013-2014 were filed during the assessment years 2013-2014 and 2014-2015, respectively.

In late April, earlier this year, the government had released income tax data for the assessment year 2012-2013. We now have data for three years and it makes for an interesting reading. Let’s look at Figure 1.

Figure 1:

Assessment yearTotal number of returns filed by individualsTotal number of individuals paying income tax
2012-2013287,66,258125,18,636
2013-2014335,85,294166,47,061
2014-2015365,13,034190,97,559

Source: www.incometaxindia.gov.in

The number of individuals filing income tax returns has gone up from around 2.88 crore in assessment year 2012-2013 to around 3.65 crore in assessment year 2014-2015. This is a good jump of close to 27 per cent over a two-year period.

At the same time the number of individuals paying income tax has gone up from 1.25 crore to 1.91 crore, during the two-year period. This is a jump of 52.6 per cent. What this means is that a greater proportion of individuals filing income tax returns is also paying income tax though a large proportion still just files an income tax return without paying any income tax. Let’s look at Figure 2.

Figure 2:

Assessment yearProportion of individuals filing income tax returns who also pay income tax
2012-201343.5%
2013-201449.6%
2014-201552.3%

 

During the assessment year 2012-2013 43.5 per cent of individuals filing income tax returns also paid some income tax. This has jumped to 52.3 per cent in assessment year 2014-2015. A greater proportion of those filing income tax also paying income tax is good news.

How do these numbers look with respect to the overall population? Let’s look at Figure 3.

Figure 3:

Assessment yearTotal number of returns filed by individuals (in Crore)Population

(in Crore)*

Proportion of population filing income tax returns
2012-20132.88126.42.3%
2013-20143.36127.92.6%
2014-20153.65129.52.8%
* Data sourced from World Bank

As can be seen from Figure 3, there has been some improvement in the proportion of population which files income tax returns. In the assessment year 2012-2013 it had stood at 2.3 percent. Two years later in assessment year 2014-2015, it had jumped to 2.8 per cent.

How about those paying income tax and not just filing income tax returns. Let’s look at Figure 4.

Figure 4:

Assessment yearTotal  number of individuals paying income tax (in Crore)Population (in Crore)*Proportion of population paying income tax
2012-20131.25126.41.0%
2013-20141.66127.91.3%
2014-20151.91129.51.5%
* Data sourced from World Bank

As can be seen from Figure 4, in assessment year 2012-2013, 1 per cent of the population paid income tax. By assessment year 2014-2015, this had jumped to 1.5 per cent. While this is a substantial improvement, 98.5 per cent of the population still does not pay income tax. This is a reflection both, of our poverty and our scant respect for income tax laws.

There is another interesting trend that comes out of the data. A bulk of individuals who pay income tax, essentially pay an income tax of less than or equal to Rs. 1.5 lakh. Let’s look at Figure 5, which deals with individuals paying an income tax of less than or equal to Rs. 1.5 lakh per year.

Figure 5

Tax payable less than or equal to Rs 1.5 lakh
Assessment yearNumber of individualsTotal tax paid (in Rs. Crore)Average tax paid (in Rs.)
2012-2013111,28,41923,44621,069
2013-2014150,64.99737,10724.631
2014-2015171,79,47443,96425,591

In assessment year 2012-2013, 88.9 per cent of the income taxpayers paid an income tax of less Rs. 1.5 lakh. This had jumped to close to 90 per cent in assessment year 2014-2015. This means the bulk of the income tax paid by individuals is actually paid by a very small number of individuals. Let’s look at Figure 6, which deals with individuals paying an income tax of greater than Rs. 1.5 lakh per year.

Figure 6:

Tax payable greater than Rs 1.5 lakh
Assessment yearNumber of individualsTax paid (in Rs. Crore)Average tax paid (in Rs.)
2012-201313,90,21791,1096,55,358
2013-201415,82,0641,02,3936,47,211
2014-201519,18,0851,47,2447,67,661

Now compare Figure 5 with Figure 6 and it is more or less clear that those paying a tax of greater than Rs. 1.5 lakh during the assessment year, even though they are very small in number, pay the bulk of the individual income tax.

In assessment year 2014-2015, around 19.18 lakh individuals paid Rs. 1.47 lakh crore as income tax in total. The total tax paid by individuals during the year was Rs. 1.91 lakh crore. So, a very small number of people paid around 77 per cent of the individual income tax. Let’s look at Figure 7.

Figure 7:

Assessment YearTotal tax paid by individualsTotal tax paid by individuals paying more than Rs. 1.5 lakh tax per yearProportion
2012-20131,14,55591,10979.5%
2013-20141,39,5001,02,39373.4%
2014-20151,91,2081,47,24477%

 

Hence, those paying an income tax of greater than Rs. 1.5 lakh, paid 77 per cent of the income tax paid by individuals during the assessment year 2014-2015. It would be interesting to see what proportion of the population do they make up for. Let’s look at Figure 8.

Figure 8:

Assessment yearNumber of individuals who paid an income tax of greater than Rs. 1.5 lakhPopulation (in Crore)Proportion of populationProportion of income tax paid by individuals
2012-201313,90,217126.40.11%79.5%
2013-201415,82,064127.90.12%73.4%
2014-201519,18,085129.50.15%77%

Hence, in assessment year 2014-2015, 0.15 per cent of the population paid 77 per cent of the income tax paid by individuals. This is a slight improvement over 0.11 per cent of the population paying close to four-fifths of the income tax paid by individuals in assessment year 2012-2013.

This as I said earlier is both because we are a poor country and at the same time have scant respect for income tax laws. At the same time our income tax laws are extremely complicated as well.

The article originally appeared in Vivek Kaul’s Diary on November 2, 2016

The Old New Business Model of Uber and Ola

uber

Cars were a luxury in the early twentieth century. Their production was a slow and an expensive process. And this basically meant that the prices at which they were sold were also very high.

At the same time the car makers employed skilled craftsmen to produce cars. As Ryan Avent writes in The Wealth of Humans—Work and its Absence in the Twenty-First Century: “The automakers employed skilled craftsmen, who often had to shape these individual components to fit the peculiarities of the car’s handmade frame. In 1908 Ford Motor Company sold only about 10,000 vehicles. Most of its 450 employees at the time were highly skilled mechanics and craftsmen.”

This changed when Henry Ford came up with the assembly-line system of producing a car. This system was inspired from the meat processing industry in the United States. In this system, known as the ‘disassembly line’, the animal’s carcass hanging from a hook attached to a powered belt moved from one butchery station to another.

At each station, workers hacked off specific cuts of meat. As the animal moved through the disassembly line, its carcass grew smaller as the meat kept getting hacked from it. Ford thought that a system in reverse could be used to produce cars.

In Ford’s system, the chassis (i.e. the base frame) of the car was moved by power lines through various production stages. Various parts of the car kept moving towards the chassis at the same time. The workers were arranged at specific positions and they attached these parts on to the car. Hence, as the chassis moved through various stages of the production process, it became bigger and bigger.

In that sense, it was the opposite of the disassembly line and came to be referred as the assembly line. The assembly line was a major innovation and rapidly reduced the number of hours needed to produce a car from more than 400 working hours to less than 52 hours decades later.

At the same time, the cost of producing a car fell as well. This led to car prices falling and a boom in demand for cars. In the process, the production of cars went up as well. This led to an explosion in employment in car production even though the labour needed to produce each car had come down.

Also, the employees needed to produce cars on the assembly line did not need to be exceptionally skilled, as was the case earlier. As Avent writes: “The people working on the line were not especially skilled, for the most part. But Ford’s clever system meant that they were nonetheless fantastically productive.”

Cut to the 21st century. App based taxi services like Uber and Ola, are working around similar lines. Take the case of the traditional cab driver (or an auto-rickshaw driver in India). He was protected by laws and regulations. Most cities do not issue permits to drive a cab or an auto-rickshaw, on tap. Hence, there are a limited number of permits going around.

Also, more importantly, the drivers need to know their way around the city. If they don’t, they won’t be able to do their jobs. Uber and other app-based cabs have simply taken these things out of the equation.

As Avent writes: “Uber entered markets with a new business structure that took advantage of technology – smartphones equipped with GPS – that made the prior knowledge much less important… In doing so it allowed relatively unskilled drivers to enter the business in vast numbers.”

The point being that many more people could operate the smartphone than know the way around big cities like Mumbai, Bengaluru, New Delhi, New York or London, for that matter. Like in case of the assembly line, the cleverness of GPS technology, has essentially ensured that many more people can now become taxi drivers than was the case in the past. This has put the traditional taxi-drivers in trouble.

The question is how long will this last? As Avent writes: “New business models that open opportunities for unskilled workers by simplifying the tasks done in an industry arguably pave the way for the eventual automation of those tasks.”

The column originally appeared in the Bangalore Mirror on November 2, 2016.

 

One Basic Lesson in Investing from the Tata-Mistry Spat

tata logo

Many media reports have been published around the spat that is currently on between Cyrus Mistry and the Tata Group. Mistry, till he was fired by the board, was the Chairman of the Tata Group of companies.

A report that has made it into the media over and over again, is that of the market capitalisation of the Tata Group of companies, falling by so many thousand crore, after Mistry was fired. Here are the links to a few of these reports.

Cyrus Mistry exit costs Tata Group companies Rs 26,472 cr in market-cap:  http://www.financialexpress.com/markets/indian-markets/cyrus-mistry-exit-costs-tata-group-companies-rs-26472-cr-in-market-cap/432492/

Tata group market cap falls Rs27,500 crore in three days

http://www.livemint.com/Money/orFsoUOMzsJCPTG8WOPSRJ/Tata-group-loses-Conglomerate-lose-Rs55000-crore-in-market.html

Investors in Tata stocks lose Rs 23,300cr in 2 days

http://timesofindia.indiatimes.com/business/india-business/Investors-in-Tata-stocks-lose-Rs-23300cr-in-2-days/articleshow/55080970.cms

Tata Group firms lose Rs 40,000 cr in market cap in three days

http://www.hindustantimes.com/business-news/mistry-vs-tata-top-tata-companies-lose-rs-40-000-cr-in-market-cap/story-tjeNfwkAootsjJZyhzgf8O.html

Group companies say Ta-Ta to Rs 26,000 crore market cap in three days

http://economictimes.indiatimes.com/articleshow/55103207.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Tatas talk up stocks as sell-off hits Rs 55,000 cr

http://www.dnaindia.com/money/report-tatas-talk-up-stocks-as-sell-off-hits-rs-55000-cr-2268100

Tata Firms Lose Rs 21,000 Crore in Market Cap After Mistry Sacking (Press Trust of India)

https://www.thequint.com/business/2016/10/26/tata-firms-lose-rs-21000-cr-in-market-cap-post-mistry-sacking-cyrus-ratan-dorabjee-tcs-consultancy

What is common to all these newsreports? They talk in absolute terms i.e., the market capitalisation fell by so many thousand crore. They don’t talk about the fall in market capitalisation in percentage terms.

This is a huge mistake. Allow me to explain. Let’s say the market capitalisation of a stock was Rs. 100 crore. It has fallen by Rs. 20 crore and is now quoting at Rs. 80 crore. Let’s say the market capitalisation of another stock has also fallen by Rs. 20 crore is now quoting at Rs. 980 crore against the Rs. 1,000 crore earlier.

If we were to follow the formula of the Indian media, we would say that the total fall in market capitalisation of the two stocks has been Rs. 40 crore. But that means nothing, given that the fall in market capitalisation in the first case has been 20 per cent and in the second case has been 2 per cent. By adding the losses, we take this nuance out of the equation. It is important to remember that a fall in the market capitalisation of a stock is always with respect to the market capitalisation prevailing earlier.

Now let’s pay attention on one particular media report here, which said that the total fall in market capitalisation of the Tata Group of Companies between October 24, 2016 and October 27, 2016, was Rs 55,000 crore. Take a look at the following table. It lists out the the fall in market capitalisation of the Tata companies for the period under consideration.

Name of the companyMarket Capitalisation (in Rs. Crore)Fall in market capitalisation
As on October 24, 2016As on October 27,2016(in Rs. Crore)
Tata Motors1,80,1141,48,09632,018
Tata Consultancy Services4,78,3904,68,6079,783
Tata Steel41,39337,6103,783
Indian Hotels12,83610,8821,954
Tata Communications19,06817,3481,720
Tata Power22,61121,0961,515
Tata Chemicals14,71313,5021,211
Tata Global Beverages9,7108,814896
Voltas13,01912,519500
Tata Elxsi4,1513,884267
Titan33,48733,270217
Rallis India4,5924,379213
Trent6,7596,580179
Tata Coffee2,5172,364153
Tata Metaliks1,068927141
Tinplate Company of India93886771
Tata Sponge Iron98291666
Tata Teleservices (Maharashtra)1,4661,41749
TRF31330112
NELCO21720710
Benares Hotels1461406
Tayo Rolls60591
  
    

Source: Livemint

This table was shared by a senior editor of the Mint newspaper on Twitter. (I have changed it slightly to the extent of rounding off the numbers). The text accompanying the table stated: “#TataSons meltdown Conglomerate loses Rs. 55,000 crore in market cap in 3 days as #CyrusMistry ouster snowballs.”

The market capitalisation of the Tata companies fell by Rs. 54,765 crore between October 24,2016 and October 27, 2016. This has been rounded off to Rs. 55,000 crore. While Rs. 55,000 crore sounds like a huge number, it doesn’t really mean much in this case.

If we were to look at the situation in percentage terms, then the total market capitalisation of the Tata companies fell by 6.5 per cent, over the three-day period. While, this is huge, it doesn’t sound as big as saying that the market capitalisation has fallen by Rs. 55,000 crore. This is what the media has been doing.

Further, if one were to look at the table carefully, it is easy to see that the bulk of the fall in market capitalisation is because of one company and that is Tata Motors. Of the total fall in market capitalisation of Rs. 55,000 crore, Tata Motors is responsible for a fall of close to Rs. 32,000 crore or 58.2 per cent of the total fall.

How does the situation look once we adjust for this anomaly? Suddenly the total fall in market capitalisation is down to around Rs. 23,000 crore (or Rs. 22,747crore to be precise). In percentage terms this fall is around 3.4 per cent.

Now the situation doesn’t look as bad as it did earlier. Or to put it in other terms, if Tata Motors, is taken out of the equation, the media headlines are no longer as sexy (for the lack of a better term) as they originally sounded.

The point being that one Tata group stock i.e., Tata Motors has had to bear the brunt of the spat between the Tata Group and Cyrus Mistry. In fact, between October 24, 2016 and October 27, 2016, the price of the stock fell by 17.8 per cent.

The other big fall has been in the case of Indian Hotels. The market capitalisation of the stock fell by 15.2 per cent between October 24, 2016 and October 27, 2016. If we were to leave this stock out as well, the total fall in market capitalisation of the Tata Group of companies comes down to 3.2 per cent.

The investors in these cases perhaps did not like these stocks anyway, and were looking for an excuse to sell out of them. The Tata Group and Cyrus Mistry spat, just provided them an excuse for it.

The major point here is that we all like to look at absolute numbers. But that doesn’t really mean anything unless we take percentages into account. This is because a rise or a fall is essentially meaningless without taking the previous price or market capitalisation into account.

This is a tendency to concentrate on absolute numbers is visible in real estate investing as well. People tend to fondly remember anecdotal stories about friends, relatives, neighbours and others, who bought a flat for Rs. 10 lakh and sold it for Rs. 60 lakh. They do not factor in the expenses over the years or the time value of money.

And that is one of the reasons that has kept the real estate bubble going.

The column originally appeared in Vivek Kaul’s Diary on November 1, 2016