India’s tax base

Aarati Krishnan has a good article on India’s tax base. It uses some high-level data – available in the public domain – to make the case that the tax base in India is not all that small as many claim. I think it is a sound argument to make and two, the policy conclusions that she derives from them are also sound.

In the final analysis, best bet to raise more money is to keep it simple, reasonable and also bet on economic growth to create more income and hence, more income tax. As simple as that.

Of course, high altitude analyses can miss out on the details.

(1) Take her calculations on wage earners:

  • Population 132 crores
  • Working age population: 66 crores
  • Agricultural workers: 50%
  • So, non-agricultural working age population: 33 crores
  • Those with year-round work: 16.5 crores
  • Wage earners who file income tax returns: 4.3 crores
  • More than 25% and this is not a small proportion.

Straightforward stuff. But, two questions are still valid. 75% that is not paying is a big proportion. Two, we do not know how many of the 25% are in a position to and do report their true wage income.

(2) Take the case of self-employed. She reckons only 13% of the households have taxable income above INR20,000 per month. That is 3.2 crore households. 13% may be small but 3.2 crore households does not sound trivial or small. There are several accountants, lawyers, stockbrokers, doctors, engineers and consultants who are self-employed. There is considerable scope for under-reporting of income there, notwithstanding the mandatory service tax collections.

(3) Based on the numbers she reports, there appears to be plenty of scope for exploring better tax take from unincorporated enterprises.

(4) Of the incorporated enterprises (17 lakhs), only 7 lakhs file annual tax returns and 5.3 lakhs of them report annual income of less than Rupees 2.5 lakhs.

There too, considerable scope exists to examine the incomes of all the 17 lakhs registered (incorporated) enterprises and to check if the 5.3 lakh tax filers have only income of Rupees 2.5 lakhs per annum.

In short, where her article carries much weight is with respect to wage earners. There may be only limited scope to extract more tax-rupees from them, in comparison to other categories of taxpayers. But, scope exists with respect to other categories of taxpayers – self-employed professionals and both incorporated and unincorporated enterprises.

So, continued use of big data, matching of data available with the government in different departments to minimise tax evasion is fair game.

But, that does not justify ‘tax terrorism’ and two, she is also correct that tax growth comes from economic growth and income growth.

Importantly, continued emphasis on the revenue side also ignores the government responsibility to squeeze the maximum economic benefits out of every rupee it spends. Administrative reforms leading to greater accountability for performance, for expenditure, for outcomes is confined to op.-eds., and blog posts such as this.

This government too has stuck to the script of the previous governments in this regard.

One thought on “India’s tax base

  1. The gaps you identified in the article are quite valid. Yes, the case I have made is the strongest for wage earners.

    I have mainly used the income and corporate data to highlight the lack of scale problem, and this is why didn’t link it to filing entities. My overall sense was that the FM/CBDT need more data to prove that non-filing is still a big issue. Under reporting of income is another issue and I haven’t really gone into it sufficiently here.
    Maybe cross-matching of GST with IT returns can tackle under-reporting?


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