Month: December 2017

0.16% of India’s Population Pays 76% of Income Tax Paid by Individuals

rupee

A couple of days back, the ministry of finance published income tax data for assessment year 2015-2016. The income tax returns for the income earned during the financial year 2014-2015 were filed in the assessment year 2015-2016.

I had written a similar piece last year based on data published for the assessment ears 2013-2014 and 2014-2015. This piece is an extension of that.

We now have data for four assessment years starting with 2012-2013 and up to 2015-2016, and it makes for an interesting reading. Let’s start with Table 1.

Table 1:

Assessment yearTotal number of returns filed by individualsTotal number of individuals paying income tax
2012-20132,87,66,2581,25,18,636
2013-20143,35,85,2941,66,47,061
2014-20153,65,13,0341,90,97,559
2015-20164,07,39,7992,05,72,727

Source: incometaxindia.gov.in 

What does Table 1 tell us? It tells us very clearly that both the number of tax returns filed by individuals as well as the number of people paying tax has been growing over the years.

While, the total number of returns being filed by individuals has risen at 12.3 per cent per year, the total number of individuals paying income tax has risen at the rate of 18 per cent per year and that is clearly good news.

Now let’s take a look at the proportion of people filing income tax returns, who also pay income tax (in Table 2).

Table 2:

Assessment yearTotal number of returns filed by individualsTotal number of individuals paying income taxProportion of people filing income tax returns who also pay income tax
2012-20132,87,66,2581,25,18,63643.52%
2013-20143,35,85,2941,66,47,06149.57%
2014-20153,65,13,0341,90,97,55952.30%
2015-20164,07,39,7992,05,72,72750.50%

Source: incometaxindia.gov.in 

Table 2 clearly tells us that only half of people filing income tax returns pay income tax. This ratio is way too low. What this basically means is that the current system is so structured that it is generating a lot of work for chartered accountants and others who are in the business of filing income tax returns.

How do things look vis a vis overall population? Let’s take a look at Table 3.

Table 3:

Assessment yearTotal number of returns filed by individuals (in Crore)PopulationProportion of population filing income tax returns
(in Crore)*
2012-20132.88126.42.28%
2013-20143.36127.92.63%
2014-20153.65129.52.82%
2015-20164.07130.93.11%

* Population data sourced from World Bank.
Source: Author calculations on data sourced from incometaxindia.gov.in 

Table 3 tells us that only 3.1 per cent of the country’s population actually files income tax returns. This figure has constantly been improving. Now let’s take a look at what proportion of the country’s population which actually pays tax in Table 4.

Table 4:

Assessment yearTotal number of individuals paying income tax (in Crore)Population (in Crore)*Proportion of population paying income tax
2012-20131.25126.40.99%
2013-20141.66127.91.30%
2014-20151.91129.51.47%
2015-20162.06130.91.57%

* Population data sourced from World Bank.
Source: Author calculations on data sourced from incometaxindia.gov.in 

Hence, around 1.57 per cent of the country’s population paid any income tax in 2015-2016. While a figure of 1.57 per cent sounds atrociously low on the whole, things do not turn out as bad, once we take other factors into account.

Agricultural income is tax free. A bulk of country’s workforce is dependent on agriculture for its livelihood. The labour force participation rate of women in case of India is very low, i.e., most women don’t work for a living. Over and above this, there are the young and the old, who aren’t making any money or enough money for that matter. And India is a young country with a bulk of its population being under 25 years or age. Once we adjust for all these factors the numbers in Table 3 and Table 4 do not look so bad.

Having said that, there are inconsistencies which need to be pointed out. There were only 57,399 individuals who have a returned income of greater than Rs 1 crore. Also, there were only 1,68,318 individuals with a returned income of greater than Rs 50 lakh in the assessment year 2015-2016 (Returned Income is the total income after chapter VI-A deduction and deductions u/s 10A/10AA (wherever applicable)). This is a tad difficult to believe when we look at other data points like the number of luxury cars that Indians buy every year, the number of Indians going abroad etc. Hence, there is a proportion of the population which is not declaring its taxes properly.

Of the 2.06 crore individuals who paid tax, a bulk of taxpayers (around 1.85 crore) paid a tax of less than Rs 1.5 lakh, during the assessment year 2015-2016. Take a look at Table 5.

Table 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)
2012-20131,11,28,41923,44621,069
2013-2014150,64.99737,10724.631
2014-20151,71,79,47443,96425,591
2015-20161,84,87,38744,61524,133

Source: Author calculations on data sourced from incometaxindia.gov.in 

So, the average tax paid by those paying a tax of less than Rs 1.5 lakh was Rs 24,133 during the assessment year 2015-2016. This basically means that the bulk of the tax is being paid by those paying a tax of greater than Rs 1.5 lakh. Let’s take a look at Table 6.

Table 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
2015-201620,85,3401,43,4166,87,734

Source: Author calculations on data from www.incometaxindia.gov.in 

Now compare Table 5 with Table 6 and it is more or less clear that those paying a tax of greater than Rs 1.5 lakh during the assessment year 2015-2016, even though they are very small in number, paid the bulk of the individual income tax. Now let’s take a look at Table 7.

Table 7:

Assessment yearTotal tax paid by individualsTotal tax paid by individuals paying more than Rs 1.5 lakh tax per yearProportion
2012-20131,14,55591,10979.50%
2013-20141,39,5001,02,39373.40%
2014-20151,91,2081,47,24477%
2015-20161,88,0311,43,41676.30%

Source: Author calculations on data from www.incometaxindia.gov.in 

Hence, those paying an income tax of greater than Rs 1.5 lakh, paid 76.3 per cent of the income tax paid by individuals during the assessment year 2015-2016. It would be interesting to see what proportion of the population do they make up for. Let’s look at Table 8.

Table 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%79.50%
2013-201415,82,064127.90.12%73.40%
2014-201519,18,085129.50.15%77%
2015-201620,85,340130.90.16%76.30%

Source: Author calculations on data from www.incometaxindia.gov.in 

Hence, in the assessment year 2015-2016, 0.16 per cent of the population paid 76.3 per cent i.e. more than three-fourths of the income tax collected from individuals. Indeed, this is worrying. But what is more worrying is that India had only 1,68,318 individuals with an income of greater than Rs 50 lakh in the assessment year 2015-2016. This just doesn’t sound right.

The column was originally published on December 22, 2017.

Personal income tax comes to Narendra Modi govt’s rescue as corporate tax falls

Earlier this week, the government released some interesting data on direct taxes which essentially are composed of corporate taxes, personal income tax. They also include tax collected through the income tax amnesty schemes launched by the governments over the years.

How have these taxes done over the years? Has the Narendra Modi government managed to collect more direct taxes than the earlier government’s (as is often said)? The recently released data provides the answers.

Take a look at Figure 1. It basically plots the direct taxes to the GDP ratio over the years.

Figure 1:

Tax to GDP

Source: http://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf

 

What does Figure 1 tell us? It tells us very clearly that the direct taxes collection as a proportion of the GDP, has remained flat over the last few years, including the three years of the Modi government. It also tells us very clearly that whenever a politician talks about the collection of direct taxes (or for that matter any other tax) going up, it should be in the context of the size of the economy (i.e. the GDP).

If that is not the case, then he or she is clearly bluffing or does not understand how taxes are reported. As I said earlier, the direct taxes are comprised of personal income tax, corporate tax and other direct taxes. First and foremost, let’s take a look at how things look if we ignore the other direct taxes. This is important for the year 2016-2017, when the government managed to collect a significant amount of tax, through two income-tax amnesty schemes, one launched before demonetisation, and one after it.

Figure 2:

Net direct tax

Source: Author calculations based on data taken from http://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf

Unlike Figure 1, which curves up at the end, Figure 2 is more flattish, once we adjust for the other direct tax. This matters in a year like 2016-2017, when the government collected Rs 15,624 crore as other direct tax, much of which was collected from income tax amnesty schemes. Once adjusted for this, the direct taxes to GDP ratio in 2016-2017 falls to 5.49 percent. In 2015-2016, it was at 5.46 percent of the GDP. This is much lower than the 6.30 percent achieved in 2007-2008. Hence, the direct taxes to GDP ratio has fallen over the years.

It is important to take a look at how does the situation look for corporate tax and personal income tax, as a proportion of the GDP, the two most important constituents of direct taxes. Let’s take a look at Figure 3, which plots the corporate income tax as a proportion of GDP.

Figure 3:

Corp tax

Source: Author calculations based on data taken from http://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf

Figure 3 tell us very clearly that corporate income tax to GDP ratio has been falling over the years. It has fallen from a peak of 3.88 percent of the GDP in 2007-2008 to 3.19 percent in 2016-2017. One reason for this has been the slow growth in corporate earnings over the last few years. Finance Minister Arun Jaitley has talked about lowering corporate income tax rates, but that hasn’t really happened. Whether lower taxes lead to higher collections remains to be seen.

Now let’s take a look at Figure 4, which plots to the personal income tax to GDP ratio.

Figure 4:

personal tax

Source: Author Calculations based on data taken from http://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf

Figure 4 makes for an interesting reading. While, personal income tax to GDP ratio like the corporate tax to GDP ratio also fell, it has managed to recover over the years. Basically, the loss of income tax from the corporates has been covered by getting individuals to pay more income tax, on the whole. One reason for this lies in the fact that the number of individual assessees have risen at a much faster rate over the years, than the number of corporate assessees. And this jump has basically ensured that the tax collections of the Narendra Modi government have continued to remain flat. They would have fallen otherwise.

The column originally appeared on Firstpost on December 21, 2017.

But What About Bitcoins?

In the last one month, many people have asked me a simple question: “But what about bitcoins?”

Between 2013 and now, the price of a single bitcoin has gone from close to zero to more than $19,000. In fact, in 2017, the price of a bitcoin has gone from less than $1,000 to more than $19,000.

This astonishing price rise has been noticed by people. But before we go any further, let’s understand what is a bitcoin? It’s a digital currency that does not use banks or any third party as a medium. It is governed by a string of cryptographical codes that are not easy to break, as they are believed to be of military grade.

The law of demand basically states that demand for something tends to pick up when the prices are low. But this basic law in economics does not tend to apply to various forms of investments. This includes, stocks, real estate etc. A large bunch of people start entering the stock market only once it has rallied significantly. The same is true about real estate.
Along similar lines, the bitcoin has caught the attention of people at large, only after having risen significantly in price. This is a point well worth remembering.

In late 2008, when the investment bank Lehman Brothers went bust, the Western world plunged into a serious recession. In order to come out of this, the Western central banks led by the Federal Reserve of the United States, the American central bank, decided to print a huge amount of money and pump it into the financial system.

The idea was to increase the supply of money and make it less costly, that is, drive down interest rates. At lower interest rates, people and corporations were more likely to borrow and spend money, and this in turn would help businesses and the overall economy.

At the same time, this power to create unlimited amount of money out of thin air created a fear that if central banks continued with this strategy, sometime in the future paper money would lose the ‘perceived value’ it had.

There was a fear that with such a huge amount of money being printed, it would unleash consumer price inflation, and money would lose value. While, that hasn’t happened, all the money has led to huge asset price inflation, stock markets and real estate markets have risen across the world, as a large chunk of the printed money has found its way into these markets.

Bitcoin was a response to this phenomenon given that unlike paper money it cannot be created out of thin air. The number of bitcoins is finite and it cannot go beyond a limit of 21 million. Hence, people initially bought into it. But, over the last year or two, at least, the people entering it are largely speculators looking to make a quick buck and that has driven up the price as fast as it has.

The trouble is the history of money essentially shows that, even though, all new forms of money are created by the private sector, they are ultimately taken over by the government. The government basically has three powers: 1) The right to “legal” violence. 2) The right to tax. 3) The right to create money out of thin air by printing it.

And this right to create money out of thin air comes from the basic fact that the people accept government money as money, in the economic transactions that they carry out. In the years to come, if economic transactions, that is the buying and selling of things, move towards bitcoins, the governments all over the world are not going to like it.

No government likes any competition against the pieces of paper that it deems to be money. And given this, the governments all over the world will want to crackdown on bitcoins sooner rather than later. What the believers in bitcoins like to say to this is that the virtual currency has been built with this eventuality in mind. How this plays out, only time will tell.

The column originally appeared in the Bangalore Mirror on December 21, 2017.

The Jholawala Who Got It Right

jholawala economics
Sense and Solidarity—Jholawala Economics for Everyone.
Jean Drèze
Rs 795.
Permanent Black

Jean Drèze, unlike other economists, has “lived experience” of India. This is clearly missing among most economists who practice economics (for the lack of a better phrase) sitting in their air-conditioned rooms, working in big cities like Mumbai and New Delhi, and just looking at data.

While looking at numbers is important, nevertheless, as Drèze writes in the introduction to his new book Sense and Solidarity—Jholawala Economics for Everyone, in the context of widows who get government pension: “What is no less useful is to spend some time with widows and the elderly and ask them about their lives. If you have a heart, their pain and helplessness will move you like no statistical evidence is likely to.”

And Drèze’s book does move at many levels. Even if you consider him to be a jholawala, you really cannot contest much of Drèze writes in this book, which is essentially a collection of columns which he has written over the years. Drèze defines a jholawala as a disparaging reference used by the corporate sponsored media for activists.

Take the case of godowns of Food Corporation of India hoarding food grains which are rotting, while the market price of rice and wheat has been going up. This scenario played out repeatedly up until a few years back.

As Drèze writes: “The food subsidy is essentially a deficit of the Food Corporation of India (FCI), whose operations are now chiefly geared to keeping food prices up rather than down. This has been achieved, temporarily at least, by accumulating massive amounts of food in FCI godowns.”

Drèze further says that the poor benefit very little from the price support measures of the government. The government buys rice and wheat directly from the farmers at a minimum support price. This tends to help the bigger farmers especially in the bigger states like Punjab and Haryana. It also leads to a lot of rice being grown in a semi-arid like Punjab. Also, it ensures that farmers like to produce rice and wheat and not diversify into other crops.

This is something that most non-jholawala economists would agree with as well.
Or take the case of the humungous bureaucracy that holds back India’s administrative system. Drèze gives the example of the sub-divisional magistrate of Latehar district in Jharkhand.

He talks about a scenario where the pension applications were being forwarded to the state government at a snail’s pace, simply because the sub-divisional magistrate had to sign each application six times. There were 13,000 applications pending, which meant 78,000 signatures were required from the magistrate.

Not surprisingly, it is such rules and regulations that lead to rent-seeking behaviour and increase the distance between good governance and the citizens of this country.
Drèze also goes into detail about the health care system in India. This is by far the best part of the book. Even though India’s growth rate has grown from strength to strength over the last quarter century since economic reforms were initiated, the country continues to lag on the health front.

When it comes to child mortality rates, India lags even countries like Bangladesh and Nepal, which have a much lower GDP per capita than that of India. As Drèze writes: “For instance, despite being about twice as rich as Bangladesh in terms of per capita GDP, India lags far behind Bangladesh in terms of child vaccination rates, breastfeeding practices, the incidence of open defecation, access to safe water, and related indicators. The same point applies if we compare India with Nepal, which is even poorer than Bangladesh.”

This is a big puzzle. Why does the country give such low priority to health? The public expenditure on stands at 3 per cent of GDP for low-and-middle-countries. In India, it is significantly less than that. What explains this?

The answer to this perhaps lies in the section in the book dealing with food security. Here Drèze offers the example of Tamil Nadu and Chhattisgarh and the success of the public distribution system, which sells food grains at a very low price to citizens in both the states. In case of Chhattisgarh it was a political calculation that worked very well for the Raman Singh led BJP. But the political calculation came with political will which ensured that people of the state got their fair share of rice and wheat at the price mandated by the government. And this led to a vocal demand for a functional PDS from the people.
As Drèze writes: “Vocal demand is very important for the success of PDS. This is one reason why the PDS works much better in Tamil Nadu than elsewhere; everyone has a stake in it. Chhattisgarh’s recent success builds on the same principle.”

The moral of the story is that once people get a taste of good governance, they are more likely to demand it than not. This is something that can be applied in case of India’s poor record on the health front. Only once there is political will to improve India’s standing on the health front, will things start changing at the ground level.

Also, it is time that the government spent more on the health front. Of course, the government doesn’t have an endless amount of money. Hence, it must allocate what it earns, properly, which it has not been doing.

Drèze talks about a huge amount of money being spent every year as fertilizer subsidy, with doubtful social benefits, and environmental damage. And above all this, it basically benefits rich farmers, who are a strong political lobby.

There are other reasons as well, including a big public sector. A big public sector was at the heart of the Nehruvian model of development. By the time late seventies and early eighties, a central government company was present in almost every sector. From condoms to colas, the government made it at all. Of course, the capital that went to the setting up of these companies could have easily gone towards more important areas like health and primary education. But it did not.

Not surprisingly, many of these companies ended up making huge losses. The government continues to subsidise the losses of many of these companies. One of the biggest of them is Air India. The company has made losses of Rs 35,891 crore, between 2010-2011 and 2015-2016. Another such company is Hindustan Photo Films Manufacturing Company. Between 2004-2005 and 2015-2016, the company has made total losses of Rs 14,960 crore.

Just between 2011-2012 and 2015-2016, the loss making public sector enterprises have lost close to Rs 1,40,000 crore. Now that is a lot of money. This does not include the loss making public sector enterprises run by the state governments across the country and the losses that they make. It also does not include the bad loans of the public-sector banks which are written off and the government has to infuse fresh capital into these banks. A lot of money is required to keep the unviable parts of the government going.
And at the cost of repetition, every rupee that funds these companies, essentially gets taken away from healthcare and other important areas like education.

To conclude, Drèze writes lucidly with a lot of passion on issues that really impact India. These are not issues that you will see corporate economists and analysts talk about, given that they are perpetually busy in selling the India growth story still going strong.
Of course, one may not agree with everything that Drèze has written. His views on Aadhar may not go down well with the supporters of the current government. Also, his views on cash-transfer may not go down well with many economists and analysts (including the reviewer) who look at it as a way of tackling huge corruption that prevails in India.

Nevertheless, most of the issues that Drèze writes and analyses, are the real issues that are holding back India and they need to be tackled sooner rather than later on a war footing.

The column originally appeared in Equitymaster on December 20, 2017.

The Crisis in India’s Agriculture Sector Which No One is Really Talking About

agriculture
The slow growth of agriculture remains a weak link in the overall Indian economy. Let’s take a look at Figure 1. Figure 1 uses the new gross domestic product (GDP) series, which was launched in January 2015, to plot the GDP growth and the growth of agriculture, forestry and fishing, within that, over the last few years.

What does Figure 1 tell us? It tells us very clearly that the overall GDP growth is much faster than the growth in agriculture on the whole. There are exceptions to this rule. In the period of three months ending December 2013 and March 2014, growth in agriculture was a little faster than the overall GDP growth.

Figure 1: 

The trouble is that the new GDP series has data starting from only June 2011. Given this, we have growth rates from June 2012 onwards. In order to look at periods before June 2012, we need to use the old GDP series. On the Centre for Monitoring Indian Economy website, I could find data from December 1999 onwards.

I have plotted that data in Figure 2. Figure 2 plots the overall GDP growth along with the growth in agriculture, forestry and fishing.

Figure 2: 

Figure 2 like Figure 1 clearly tells us that even as per the old GDP series, the GDP growth as a whole was much faster than the growth in agriculture, forestry and fishing. Of course, there were occasions (though not many) where the overall GDP growth was slower than growth in agriculture.

The result of this slower growth has been the size of agriculture as a part of the overall economy has been shrinking over the years. This becomes clear from Figures 3 and 4. Figure 3 uses the new GDP series data, whereas Figure 4 uses, the old GDP series data.

Figure 3: 

Figure 4: 

What Figures 3 and 4 tell us very clearly is that the size of agriculture as a part of the overall economy (measured by the GDP) has shrunk rapidly over the years. This has happened because the overall GDP (i.e.the non-agriculture part of the economy) has grown at a faster rate.

As can be seen from Figure 4, in 1950-1951, agriculture formed more than 40 per cent of the economy. By now it is down to 12 per cent. This has happened as the average land holding on which farming is carried out has fallen over the years, as land has been divided across generations. The average size of the land farmed by the Indian farmer has fallen over the decades and in 2010-2011, the last time the agriculture census was carried out, stood at 1.16 hectares. In 1970-1971 it had stood at 2.82 hectares. This fall in farm size has made farming in many parts of the country, an unviable activity, leading to the size of agriculture as a part of the economy becoming smaller and smaller.

The trouble is that agriculture still employs a large portion of the workforce. While, it’s contribution to the overall economy has come down, a large number of people continue to remain dependent on income from agriculture. Take a look at Table 1.

Table 1:

YearAgriculture’s share in the rural economic output (in per cent)YearShare in rural employment (in per cent)
1970-197172.41972-197385.5
1980-198164.4198383.6
1993-199457.01993-199478.4
1999-200051.41999-200076.3
2004-200538.92004-200572.6
2011-201239.22011-201264.1

Source: Changing Structure of Rural Economy of India Implications for Employment and Growth, Ramesh Chand, S. K Srivastava and Jaspal Singh, Discussion Paper, NITI Aayog, December 2017.

As can be seen from Table 1, the share of agriculture in the rural economy has fallen from 72.4 per cent to 39.2 per cent, over the four-decade period between 1970-1971 and 2011-2012. During the same period, the proportion of people dependent on agriculture as a mode of employment, hasn’t come down at the same rate.

In 1972-1973, the share of agriculture in rural employment was 85.5 per cent. This came down to 64.1 per cent in 2011-2012. So, 64.1 per cent of the rural workforce produced 39.2 per cent of the rural economic output in 2011-2012. Hence, agriculture has many more people dependent on it, than is economically feasible.

It is clear from Table 1 that between 2004-2005 and 2011-2012, the proportion of people dependent on agriculture as employment has come down. This is a trend that would have continued. Even with that many more people continue to be dependent on agriculture than is economically feasible.

Also, given their lack of technical skills, it remains difficult for people trying to move out of agriculture to find other jobs. Or find jobs that pay better.

Table 2: Education level (general and technical) of usually employed rural workers of age 15-59 years

(per cent)
Percent of rural workersMaleFemalePersons
2004-052011-122004-052011-122004-052011-12
Secondary Education and above19.727.16.811.814.922.3
With technical education1.71.60.70.71.31.3
With vocational training14.215.413.012.713.814.6

Source: Authors estimation based on unit-level NSS data on employment and unemployment survey.
Source: Changing Structure of Rural Economy of India Implications for Employment and Growth, Ramesh Chand, S. K Srivastava and Jaspal Singh, Discussion Paper, NITI Aayog, December 2017.

Table 2 tells us that the education and technical skills of rural India are fairly limited. Given this, their ability to find a job outside agriculture remains limited. Also, the secondary education which more than a quarter of men had had in 2011-2012, cannot be taken very seriously. Madhav Chavan, of the Pratham Education Foundation, estimates that in the period of the ten years up to 2015, 10 crore children completed primary school without the ability to do some basic reading and mathematics.

If people are to be moved out of agriculture, first and foremost the quality of education being imparted in rural India needs to improve. The focus, at least in the initial years, needs to be on teaching basic skills of reading, writing and the ability to do basic maths, rather than complete the syllabus, as is the case currently. Also, the current system of no exams till class VIII needs to change. Further, skill development in order to make individuals employable, needs to be encouraged further and happen at a much larger scale than it currently is.

There are a whole host of issues that are holding Indian education back. These need to be tackled with obvious as well as out of the box solutions. And for this to happen, the ministry of human resource development needs to be a high-profile ministry, in fact the most important ministry in the government, which it currently isn’t, nor was it earlier.

The column was originally published in Equitymaster on December 21, 2017.