Indias income tax structure,income tax

Why does only 1.5% of Indians pay the tax?

‘Paying taxes is of no use to us because the government doesn’t do anything for us.’- Average Indian.

This particular statement often is misunderstood in a way that only a few Indians pay taxes, and the majority of these taxpayers are unhappy with the criteria. This leads to another argument, do millions of people hide their income to evade taxes?

India is a country with a population of 138 crores and thus a large number of people could be taxpayers in the country. Yet much to your surprise, only 1.5% of the population actually pays tax. An average person could argue that thousands of millionaires hide incomes to evade paying taxes owing to the corruption in the country. But this is a huge myth, in reality, most of the people who are eligible to pay tax actually pay it.

So, why does India has only 1.5 % of taxpayers?

India has only few taxpayers because India’s income tax structure is designed in a way that allows only a small percentage of people eligible to pay tax. To understand this, we must look into the income tax structure of the country and why paying tax is important.

Indias income tax structure,income tax

Taxes are an important source of the Government’s income which is further used to fund infrastructure or other projects in the country. Thus people of India are required to pay two types of taxes- direct and indirect tax. The direct tax includes income tax, gift tax, capital gain tax e.t.c. The indirect tax includes value-added tax, service tax, goods and service tax, customs duty, etc. Understand this by an example, the tax you pay on your basic salary or income is counted as a direct tax, while the tax you pay to service providers such as waiters in the restaurant is the indirect taxes.

Who is eligible to pay taxes in the country? According to the latest income tax rules, the Union Minister states that people earning more than Rs.5 lakh annually are eligible to pay an income tax. Thus the people who earn less than 5 lakhs a year are not bounded to pay any income tax, which is a direct tax. Though these people do not pay taxes on income, they are however bounded to pay indirect taxes such as Good and Service tax.  Addionally, Indians living abroad also do not pay taxes as any income earned outside India is not taxable. Only if their income is earned or accrued in India- it is taxable.

Coming back to the basic income structure, how many Indians earn more than 5 lakhs a year? The answer is- only 3%. Yes, the majority of the population in India earns below Rs.2.50 lakh a year. Thus India has a very low-income base.  The average national income of the Indian adult population is Rs 204,200. India has a very high-income tax limit, thus intuitively many Indians automatically fall out of the income tax bracket.

Hence, the whole debate is based on India’s per capita income. India’s per capita net national income or NNI was around 135 thousand rupees in 2020. Looking at the figures it’s clear that India’s average income is not artificially low. Additionally, hiding income comes at a very large scale. Not many Indian have assets enough to hide stacks of cash from the government because India’s per capita income is calculated through India’s GDP. People hiding money will eventually use it to buy properties, gold, etc which is further reflected in the GDP. Thus, it’s quite impossible for an average Indian to hide cash for years because at some point it will get reflected in RBI’s money supply data as soon as they use them.

Indias income tax structure,income tax

This does not mean that the system is completely transparent or there is no corruption, surely there are many millionaires who have managed to hide their incomes or converted their black money into white. But if we go by the country’s GDP or economic data, most Indians do not even earn enough to pay any taxes. And since budget 2019 exempted individual taxpayers having income up to Rs 5 lakh, so automatically 4.32 crore individual taxpayers who have income up to Rs 5 lakh are not liable to pay tax for the current FY20 and following years.

This way, it’s not the corruption in the country that makes India’s total taxpayers count to be only 1.5%, it’s actually because the rest of the population doesn’t fall into the income tax limit.

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