Why ... only 6.25 % of Indian pay income tax?

Why India has so less population paying Income tax we will navigate by the understanding the data

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When you see headlines stating “Only 6.25 per cent pay income tax ?”, its is misleading. They pay tax, just not on their income. When they buy a pack of biscuits, cigarette … they pay GST. When they go buy fuel, they pay taxes. When they consume most things, they pay their fair share, via indirect taxes. So we have to account for that too.

But here we are looking into the direct taxes only.

India Is developing country with growing population with estimated people of 1.4 Billion people and sadly only 6.25 percent pays an income tax. Thats literally 1% pay the income tax

You may ask why sad about it?

When we compare the data with the developed nation we see India is way beyond the path. The Insight were as follows:

97.1 % - Norway [According to a 2019 report by the Organisation for Economic Co-operation and Development (OECD)]

The countries that have more than 90% coverage are Denmark , Sweden (91%). While Finland (89%) and Germany(85%) follows them.

While these are smaller countries per population. But when we compare it with top population countries we have a different view.

According to a report by the Chinese government, as of 2019, around 61.3% of the total urban population in China paid personal income tax. While other majority of population lives in rural china.

USA: According to the Internal Revenue Service (IRS), around 55.7% of all tax returns filed in the USA in 2018 resulted in a tax liability, which means that these individuals or households paid income tax.

Income tax is one of the major sources of revenue for the government of India. It is a direct tax paid by individuals and corporations on their income earned during a financial year.

The income tax department of India has been continuously working to increase the tax base by bringing more people under the tax net. However, despite these efforts, only a small percentage of the population pays income tax.

But before we realise the importance of income tax most would argue.

What does the Government do for citizens ?

It is true that India does not offer social security and free medical facilities as being provided in some developed countries.

But we need to ponder over the issue with a larger canvass.

We need to appreciate that the Government has to discharge a number of responsibilities, which include Health care through Government hospitals (usually they offer service without any cost), Education (In Municipal and Government schools the fee is negligible).

The Government also provides cooking gas at concessional rate or gives subsidy. Of course the major expenditure of Government has to be incurred on National Defence, Infrastructure Developments etc.

Taxes are used by the government for carrying out various welfare schemes including employment programmes.

There are Lakhs of employees in various departments and the administrative cost has to be borne by the Government.

Though the judicial process involves delay, yet the Salaries, perks of Judges, Magistrates and judicial staff has also to be paid by the Government.

We need to appreciate that we must pay tax as per law. We have to act like a responsible citizen. —- Quoted by IT Dept

A tax payer in general feels that taxes are a burden and it is human tendency to avoid payment of tax or at least minimising the tax liability.

In earlier years the tax rates were also exorbitant. Prior to Eighties, the rate of Income-tax was as much as 97.75 per cent inclusive of surcharge. But now the scenario is fast changing. Though the tax rates have been lowered, but still our country lacks desired tax culture like developed nations.

How Much did we collect from direct tax ?

When you see the above chart We had a slow growth in total income tax collected until FY21. But in the year FY22 we had a surge in the income-tax collected and may be due to back in business post Covid and lockdown.

Which states contribute to ITR Filings/Population?

According to the Income Tax Department, around 67 million individuals filed ITRs in India for FY2020-21. However, this figure includes individuals who filed ITRs for previous years as well.

The State of Maharashtra with total filing of(1.04 crores) tops the list. while Delhi ranks number 1 with 10.4 percent of the population filing ITR.

Additionally, the data is based on the number of individuals who filed ITRs, and does not necessarily reflect the actual number of taxpayers in a given state.

As per the income tax department data, around 58% of the income tax filers for the financial year 2020-21 were salaried individuals. The remaining 42% were non-salaried individuals, including professionals, business owners, and others

Some estimates suggest that only 3% of Indians take home an annual salary of more than ₹5 lakhs. In fact, the top 10% of Indians have an annual income of just ₹3 lakhs! And the ₹5 lakhs threshold is extremely relevant because the government exempts all those who make less than ₹5 lakhs. They don’t have to pay a tax on their income. They’re legally not obligated to. So it’s not their fault. It’s the government's doing.

One other development in the years 2016-17 and 2017-18 deserves mention here. Recommendations of the 7th pay commission were implemented in 2016-17. This could be seen in an increase in the number of government employee and pensioners in the overall taxpayer base.

This category of taxpayers increased from 5.4 million in 2014-15 to 13.7 million in 2018-19. This data was also placed before Parliament very recently.Secondly, growth in the low-income group of taxpayers after its 50 million peak in 2018-19 started to see a declining trend—it slipped to 46.3 million in 2019-20, dropping further to 41.2 million in 2020-21.

What could be the reason ?

Agriculture dependent economy and has zero tax.
According to the latest available data from the World Bank, which is from 2019, around 43.4% of India's total labor force is engaged in agriculture, which includes both self-employed farmers and agricultural laborers’s.

This means that agriculture remains a significant source of livelihood for a large portion of the Indian population, even though its contribution to the country's gross domestic product (GDP) has been declining over the years.

According to data released by the International Monetary Fund (IMF) for the financial year 2020-21, India's tax-to-GDP ratio was around 8.2%, which is lower than the average for developing countries, which is around 14.5%.

Young Population
According to the latest available data from the United Nations, which is from 2020, around 47.2% of the total population of India is below the age of 21.

This means that nearly half of the country's population consists of children and young adults who are below the legal age of adulthood.

Informal sector
A International Labour Organization (ILO) report suggest, around 80% of the workforce in India is employed in the informal sector, which is characterised by low wages, poor working conditions, and lack of social protection.

As a result, many people in the informal sector do not have a stable source of income and do not come under the tax net.

Indian Mentality (do you also agree?)

• Most people think taxes are a burden and should be avoided.

• people may feel that they are not getting enough benefits in return for the amount of tax they are paying, and the punishments for not paying are too harsh. As a result, more people are choosing not to file their taxes.

• We can only have a good tax system if both people who pay taxes and people who collect taxes do their jobs well.

• Some people who pay taxes feel upset and hopeless because tax collectors have wrong ideas about their power, try to make taxpayers do their work for them, don't care about them, and think taxpayers are trying to cheat and avoid taxes. These ideas are bad for a healthy tax system.
  

A lot of people don’t file their taxes because they still believe they can get away with it. Even others misreport their income, claim fraudulent deductions and pay less than their fair share. So clearly it’s an ongoing issue.

But you don’t solve this problem by demonising the others. A better approach perhaps is to educate people on how tax proceeds actually help build the country. Simplify the process further, and for the government to show results. This could help spur behavioural change. It could help India widen its tax base.

Until then…