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Why isn’t most of India paying Income Tax?: Myth-busting before Budget 2021

by Suresh Agarwal

January 31, 2021
Reading Time: 4 mins read
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Photo by Pixabay on Pexels.com

Person 1: Only 1% of India pays Income Tax. It’s a sad state of affairs. 

Person 2: Obviously. There’s black money, and evasion, and most eligible tax-payers don’t pay up. 

Person 3: And we know they can pay if they want to- because look at the motorcycles and cars and houses being bought…I think I see wealth everywhere. 


A common myth, perpetuated by such loose analysis, in the examination of Indian tax-paying and economics, is the ignorance of the working of and real data on taxation. For long, it has made the Income tax-evading unscrupulous wealth-owner part of popular imagination. Last year, the PM complained that only one and a half crore people pay IT in India, while 18 crore people have two-wheelers.

Conspicuous consumption is not a wholly bad indicator of individual wealth. But there’s more to this than meets the eye.

The reason most Indians do not pay tax had nothing to do with dishonesty, and everything to do with the tax structures. According to India’s tax structure, only those earning above 5 lakh rupees are eligible to pay tax in a fiscal year. According to the Economic Survey, the per capita income is 1.4 lakh.

That straight away removes the average, and below average wage earner from the tax net. In contrast, most other nations have a tax bracket that begins below the average income level, which means more people qualify to pay tax. In the US, 22% tax is paid by the average earner. That figure is 10% in China. Bloomberg estimates that only 3% of Indians earn above 5 lakh per year.

Even if money was stashed away by tax-evaders, as is thee popular myth, it seems that money will be used to make purchases of registered items- consumer durables- cars, refrigerators- jewelry, shares, stocks, real estate. Also, these high-value purchases are linked most often to a Permanent Account Number Card, which makes cross-checking for wealth and tax paid, possible. And that would bring the money into the record of RBI’s money supply. That would make it a part of GDP calculations, which would make it part of the per capita estimate.

So unless people are stashing away money as some sort of ludicrous compulsive disorder- where they just like to stash away money in roofs and under floors for the sake of it- and not really to spend it, it’s not possible, as Bloomberg estimates, for most Indians to be in the tax-paying bracket.

The tax rate needs scrutiny, too. In the UK, the lowest tax bracket is 20%. In the USS, it is 10% (federal tax). Thus, income tax in India takes rather a low amount, from a rather small pool of people.

It is a popular notion in other countries that one must pay taxes if one isn’t below the poverty line. In the US, if you’re earning above poverty line, you’re eligible to pay tax- the net is set that way. In India, you must wait another 3.6 lakh before you pay tax. That 3.6 lakh margin between tax and poverty is crores and crores of people.

It was in 2019, the election year, that the government increased the lowest tax paying slab to 5lakh. That is, those under 5lakh of income were exempted from paying tax. That allowed, by some estimates, 75% of people to fall out the tax bracket.

As per the CBDT, that issued a clarification after the PM complained that only 1.5cr Indians’ paid tax, only 1 crore individuals earned more than 5lakh and below 10lakh, and 46 lakh people earned more than 10lakhs a year. Only 3.16 lakh people disclosed an income above 50lakhs in the filed IT returns in FY 2018-19, and 8,600 people disclosed income above INR 5 crore.

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But like the Economic Survey of 2021 argues, inequality is not the first foe for the government. In fact, it argues that the smaller ‘size of the economic pie’ is the problem, and more economic growth would do better for the cause of poverty alleviation than inequality reduction could.

It also argues that the relationship between inequality and socio-economic growth is different in India as in advanced countries, and that the macro trends for advanced economies must not be held comparable with ours. However, it remains to be seen if the principle of an expanded tax net emerges in the Budget out of the narrative the Economic Survey has tried to create- making inequality seem less of a foe than before.

Is this a build up to an expanded tax net, or other measures that shall bring more people to pay up?

Given the unprecedented economic times we’re in, the jury might be out on that long after the Budget is read out on the floor of Parliament.

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This account represents the editorial squad of Converciti. We showcase the best curated articles from a wide variety of writers.

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