Personal Income Tax

Why income tax is not going to be abolished anytime soon

Dr Subramanian Swamy has time and again suggested that personal income tax should be abolished. The logic is that this will put more money in the hands of people, and they will go out there and spend a lot of it, and this will benefit businesses and the overall economy.

What the government will lose out on the direct tax front, it is likely to make up from indirect taxes like goods and services tax, as people consume more. Companies will earn more and as a result pay a higher corporate income tax.

So, clearly there is economic logic to what Dr Swamy has been suggesting over the years. But the fact of the matter is that no government will have the balls to take a decision like this.

Take a look at the following chart.


Source: Author calculations on data sourced from www.cga.nic.in and www.indiabudget.nic.in

The chart plots personal income tax as a proportion of total gross taxes collected by the central government. In the last ten years, this has gone up. In 2019-20, the last financial year, the total personal income tax collected formed 23% of the overall taxes collected by the central government.

Other than personal income tax, the central government collects central goods and services tax, corporate income tax, union excise duty and customs duty, as well. These taxes form a bulk of the taxes collected by the central government.

In 2020-21, the central government hopes to collect a total of Rs 6,25,000 crore as personal income tax. This is around 26% of the total taxes that the government expects to collect in the year.

Of course, this estimate was made before covid-19 struck. Nevertheless, irrespective of that what it tells us is that the government during 2020-21 hoped to collect more personal income tax as a proportion of overall taxes than it has ever done before.

If the government does away with individual income tax as Dr Swamy has suggested over the years and as many income taxpayers have come to wholeheartedly want, it loses nearly a fourth of its tax revenue immediately.

As mentioned earlier in the piece, this will mean a windfall for individual income taxpayers. As they spend a part of this money, the government will earn taxes in other forms. At least that’s what the theory suggests. The government can also sell a lot of assets (its shares in public sector enterprises and land) that it owns to make up for the elimination of personal income tax.

And that’s where the trouble is. No government in its right mind will give up on a fourth of its tax revenues, just in the hope of making up for it through other ways.

Also, it is worth remembering that the salaried pay a major portion of individual income tax. It is easy to tax salaried income. And anything that is easy to tax, no government is going to give up on. And finally, what happens to all the taxmen if personal income tax is done away with? So, clearly there is no incentive for the government to do away with personal income tax.

Hence, hoping that the government will abolish personal income tax is at best a pipe dream. It’s not going to happen.

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.

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

0.11 Per Cent of India’s Population Pays 80% of Its Personal Income Tax

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The Income Tax department shared some very interesting data last week. In today’s column I will look at these data points and try and make some sense of them.

a) In the assessment year 2012-2013, around 2.87 crore individuals filed income tax returns. The total income tax collected from these individuals amounted to Rs 1,14,555 crore. In assessment year 2012-2013, income tax returns for the income earned in 2011-2012 had to be paid.

The interesting thing nonetheless was that only 1.25 crore individuals paid any income tax. Data from the World Bank shows that in 2011 the population of India was 124.7 crore. This basically means that in assessment year 2012-2013 around 1% of India’s population basically paid income tax.

One explanation for this is straightforward that income from agriculture is untaxed. Close to 50% of   the country’s population still depends on agriculture for a living. Further, this also tells you that India is a poor country, where most people earn a taxable income of under Rs 2.5 lakh per year, above which one has to start paying income tax.

What this  also tells us among other things, is that a major part of the Indian economy continues to operate in the black zone. Hence, a tremendous amount of black money is generated, on which income tax does not get paid.

b) Around 3.94 lakh Indians pay a tax of greater than Rs 5 lakh. In total they paid an income tax of Rs 64,313 crore in assessment year 2012-2013, which made up for around 56% of the income tax paid by individuals.

Further, around 13.9 lakh Indians paid an income tax of greater than Rs 1.5 lakh. In total, they paid an income tax of Rs 91,110 crore. This made up for around 79.5% of the total income tax paid by individuals for the assessment year 2012-2013.

This means that around 0.11% of India’s population (13.9 lakh divided by 124.7 crore) paid around 80% of the income tax paid by individuals in the assessment year 2012-2013. This is one data point that clearly tells you how few Indians actually pay income tax.

c) Only around 26 lakh Indians filed for income from house property under the individual category. A total income of Rs 29,927 crore was declared under this category.

Of this around 6.06 lakh showed losses under income from house property. This would primarily include people who have taken on a home loan to buy a house and are repaying it. The interest paid on a home loan can be adjusted as a loss. Prima facie the number seems to be extremely low.

Further, this means that around 19.95 lakh people declared “real” income from house property. This is another extremely low number. What this means is that there are only 20 lakh landlords in the country. This is a clear indication of the fact that most landlords are getting their rents paid in cash and not paying any income tax on it. It may also be an indication of the fact that many landlords have not put up their homes on rent.

d) The data points released by the income tax department answers a major question—what is the effective rate of personal income tax in India. We all know that there are three income tax rates of 10%, 20% and 30%, with a higher rate being applied as the income goes up. Nevertheless, what portion of income is the government actually able to collect as tax, after all the deductions are applied, is an interesting question to answer.

Income under the head(in Rs crore)
Salary6,27,200
House property income29,927
Business income4,03,251
long term capital gain30,479
short term capital gains3,290
Other sources income1,28,020
Interest income44,918
Total Income12,67,085
Total tax collected1,14,555
Effective rate of income tax9.04%

 

Take a look at the above table. For the assessment year 2012-2013, individuals declared a total income of Rs 12,67,085 crore. On this an income tax of Rs 1,14,555 crore was collected. This means an effective rate of 9.04%. Hence, the effective rate of income tax is even lower than the lowest rate of 10%. This is clearly a reason to worry for the government.

e) While the release of detailed income tax data is a good start, much more remains to be done. First and foremost, data from more years needs to be released. This means releasing data from prior to assessment year 2012-2013. It also means releasing data from years after assessment year 2012-2013. More data would help researchers spot trends over the years.

The data released last week is now almost half a decade old. It would be great that in the time to come, the income tax department can be more prompt in releasing such data.

f) One major complain I have with the income tax department on this is that they released the data in the form of PDF files. While that is fine, data in the form of excel files should also have been released. This makes the data machine readable immediately and is of tremendous importance for researchers. Otherwise a lot of time is uselessly spent in transferring data from the PDF files to an excel file.

g) Also, it would have been great if exempt income (like dividend income from stocks, long-term capital gains on stocks etc.), would also have been declared. This would have given us some idea how much potential tax is the government losing out on.

To conclude, this is a good start. Nevertheless, more income tax data needs to be declared in the time to come.

The column originally appeared on the Vivek Kaul Diary on May 3, 2016