Who Really Pays Income Tax in India?

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In late October, 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.

Some interesting conclusions can be made based on this data. In the last two columns, I looked at this data and I continue to do the same here. In this column, we try and look at the effective rate of income tax paid by the various type of taxpayers. Look at Figure 1.

Figure 1:

Assessment YearTotal gross income declared (in Rs. Crore)Total tax payable (in Rs. Crore)Effective rate of income tax
2012-201321,17,2363,57,40516.9%
2013-201424,31,6973,93,91816.2%
2014-201526,93,0324,46,71916.6%

Source: Author calculations based on Ministry of Finance data.

The Figure 1 gives us details of the overall income declared by Indian taxpayers and the total income tax collected against it. As we can see the effective rate of income tax is between 16-17 per cent for the assessment years under consideration. The effective rate of income tax is essentially the total income tax payable divided by the total gross income declared by the various taxpayers.

Things get interesting when we start breaking down this overall data. Look at Figure 2, which has the details regarding the income declared by individuals.

Figure 2:

Assessment YearTotal gross income declared (in Rs. Crore)Total tax payable (in Rs. Crore)Effective rate of income tax
2012-201312,14,2891,12,1129.2%
2013-201415,12,4331,39,5009.2%
2014-201518,41,7821,91,20810.4%

Source: Author calculations based on Ministry of Finance data.

The effective rate of income tax paid by individuals in the assessment years under consideration are in the range of 9.2 per cent and 10.4 per cent. A major reason for this lies in the fact that a bulk of individuals who file income tax returns and declare their income, do not pay any income tax. Look at Figure 3.

 

Figure 3:

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

Source: Author calculations based on Ministry of Finance data.

The Figure 3 shows the proportion of individuals filing income returns also paying an income tax. In the assessment year 52.3 per cent of individuals filing income tax returns also paid taxes. While this had improved since assessment year 2012-2013, still close to half of those who filed their income tax return, did not pay any income tax.

A lower effective rate of income tax in the range of 9.2-10.4 per cent can also be explained through the spate of exemptions and deductions that are available to individuals filing income tax returns.

In fact, the data released by the income tax department does not give a split of the total taxes payable on the salaried income of individuals in comparison to the total taxes payable on business income of individuals. This would have made for a very interesting comparison. My guess is that the effective rate of income tax on business income of individuals who have been even lower than 9.2-10.4 per cent, given all the expenses they can deduct to arrive at their taxable income.

While, the effective rate of income tax of individuals in the assessment years under consideration has been in the range of 9.2-10.4 per cent, the overall effective rate has been higher than 16 per cent. So, the question is who is paying up?

The total amount of tax that needs to be paid by Hindu Undivided Families is too small. Nevertheless, their effective rate of income tax is even lower than that of the individuals. In the assessment year 2014-2015, against a total gross income of Rs 32,218 crore, taxes of Rs 2,845 crore needed to be paid. This works to an effective rate of income tax of 8.8 per cent.

Getting back to the question of how is the overall effective rate of income tax higher than 16 per cent, when that effective rate of income tax of individuals in the assessment year 2014-2015, was just higher than 10 per cent. Look at Figure 4. It shows the details regarding the income tax paid by the companies.

Figure 4:

Assessment YearTotal gross income declared (in Rs. Crore)Total tax collected (in Rs. Crore)Effective rate of income tax
2012-20137,87,0912,21,47028.1%
2013-20148,05,2892,28,24228.3%
2014-20157,32,4532,26,49030.9%

Source: Author calculations based on Ministry of Finance data.

What the Figure 4 tells us is that companies pay a significant of the income tax collected in India. And the effective rate of their income tax as can be seen from the above table is significantly higher than that of individuals.

What is interesting is that the total amount of tax paid by companies has remained more or less constant in the time under consideration, though the effective rate of tax has increased to 30.9 per cent. At the same time, the total amount of income tax collected from individuals has been growing at a rapid pace (as can be seen from Figure 1).

Further, an effective rate of income tax of close to 31 per cent for companies is not in line with the effective rate of income tax declared in the statement of revenue foregone published along with the budget every year.

For 2013-2014 (the tax return on the income earned during this financial year was filed in the assessment year 2014-2015), the effective rate of income tax was a much lower 23.2 per cent.  I don’t have an explanation for this anomaly.

Nevertheless, even an effective rate of 23.2 per cent, is significantly higher than an effective rate of 10.4 per cent for individuals. Lest individuals feel that they are getting away with a lower effective rate of income tax, that is not the case. What the government loses out on a lower effective rate of income tax, it more than makes up for through the service tax and other indirect taxes.

For starters, try looking at your restaurant bill for once.

The column originally appeared in Vivek Kaul’s Diary on November 7, 2016

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

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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