Where are Indian taxpayers?
On February 13, India’s income tax department revealed that only 57.8 million people declared income in FY 2018-2019. With a population of 1.35 billion, that’s roughly 4.3% of the Indian population. Of this number, 43.2 million people fell below the lowest income tax bracket, exempting them from any taxes. Thus, only 14.6 million people – about 1.08% of the population – will actually be contributing to the nation’s tax revenue.
Where are Indian taxpayers?
India is infamous for having a large underground economy, that refers to economic transactions that are deemed illegal, either because the goods or services traded are unlawful in nature or because transactions fail to comply with governmental reporting requirements. Current estimates suggest that approximately 20% of the nation’s income comes from this non-taxable money circulating the economy. Furthermore, India only has 8% of its workforce in the formal sector; 92% of the labor in the country works in the informal sector, making it the backbone of the economy. The informal economy is neither taxed nor monitored by any form of government, thus also making it exempt from taxes.
Thus, how much tax you pay as an Indian citizen depends less on how much you earn and more on how much you can hide – or show income as non-taxable. In a country historically known for corruption, this action goes rather unregulated
What can be done to fix this?
The primary reason as to why people are engaged in the informal economy, particularly in developing countries, is the ease of doing business. Those who wish to join the workforce can easily find a job or engage in informal economic activity. Hence, the challenge of creating “good jobs” in India could be seen as the challenge of creating more formal sector jobs, which also guarantees worker protection as well as clearly recording income statistics.
The differential treatment of the two classes of taxpayers is not unique to India, but the large and widening gap in tax liability between the two is. With passing years, the system is getting more skewed. In the last 15 years, the number of people filing tax returns has grown four times faster than the number of taxpayers.
A large section of these ‘tax-filers-but-not-payers’ is non-salary income earners. In fact, as a percentage of the population, the number of income taxpayers has been falling indicating, among other things, an even heavier burden on the salaried class.
Perhaps the government needs to take a slightly different approach to the integration of the informal economy into the formal one – instead of taking on the burden of trying to create new jobs for everyone, it may be better to direct efforts towards building bridges between the two. A recent shift towards online payment methods in India has helped in this regard; more economic activities are now being tracked.
Ultimately, however, it is the people who must realize the importance of tax revenue to the government, enabling them to develop better infrastructure and providing social security and welfare to the people. Without the revenues to do so, the government will be left crippled even if it wanted to make changes.
The incumbent Prime Minister Modi’s government has been accused of tax harassment in their recent attempts to pressure the people into declaring their incomes. The change will come gradually. PM Modi has taken the criticisms seriously and implemented policies to make the taxation system more friendly. "All governments hesitated to touch the tax system. We are making it citizen-centric. India has become one of the very few countries to have a transparent taxpayers' charter that will clearly define the rights of taxpayers. I want to assure you that tax harassment will be a thing of the past in our country," he said. This has been seen with the near-elimination of individual state-level taxes, and instead, the implementation of a centralized Goods and Services Tax (GST), which also enhances the ease of doing business.
The key obstacle facing India on its journey to becoming a developed country is this dichotomous division within the economy. The sooner politicians are able to fix it, the better. However, it remains to be seen whether the Modi government is able to accomplish this, particularly when there is low confidence in Finance Minister Nirmala Sitharaman.
