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 Year Total gross income declared (in Rs. Crore) Total tax payable (in Rs. Crore) Effective rate of income tax
2012-2013 21,17,236 3,57,405 16.9%
2013-2014 24,31,697 3,93,918 16.2%
2014-2015 26,93,032 4,46,719 16.6%

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 Year Total gross income declared (in Rs. Crore) Total tax payable (in Rs. Crore) Effective rate of income tax
2012-2013 12,14,289 1,12,112 9.2%
2013-2014 15,12,433 1,39,500 9.2%
2014-2015 18,41,782 1,91,208 10.4%

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 year Proportion of individuals filing income tax returns who also pay income tax
2012-2013 43.5%
2013-2014 49.6%
2014-2015 52.3%

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 Year Total gross income declared (in Rs. Crore) Total tax collected (in Rs. Crore) Effective rate of income tax
2012-2013 7,87,091 2,21,470 28.1%
2013-2014 8,05,289 2,28,242 28.3%
2014-2015 7,32,453 2,26,490 30.9%

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

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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