Tax collection ( Direct and Indirect) in India accounted for only 12% of India’s GDP in financial year 2016-2017. Total number of income tax payers in India was only 1.5 % of our population in the same year. That is only about 20 million people paid income tax in India out of a population of 1300 million. Out of these 20 million tax payers, those having taxable income of less than Rs. 250,000/- per year (Total income of less than Rs. 500,000/- per year), accounted for 93% of the total tax payers.
So the big question? Are the remaining 1280 million people not having any income greater than Rs. 250,000/- per year? Leaving aside children and senior citizens, India has a work force of about 800 million people, who account for about 60% of the total Indian population. So are the remaining 780 million people not earning any income at all? and if they are earning, why are they not paying any income tax?
Income tax slabs in India as per last years budget ( 2018 budget):
< 300,000/- per year. No income tax.
300,000/- to 500,000/- per year. 5% of income above 300,000/-.
500,000/- to 10,00,000/- per year. 20% of income above 500,000/- plus 10,000/-
> 10,00,000/- per year. 30% of income above 10,00,000/- plus 110,000/-.
At such high tax rates, it’s no wonder that people don’t want to pay income tax. It is easier to pay some thing to the tax guy and get away with the rest.
In addition to income tax there are several other taxes on income such as:
1. Dividend Distribution Tax (DDT) @ 20% (including surcharge and education cess) for dividends declared by the company.
2. Dividend received over Rs. 10,00,000/- per annum by individuals is also subject to tax at 10% of dividend received.
3. Short Term Capital Gains Tax.
4. Long Term Capital Gains Tax.
5. Corporate Tax at 21% of corporate income.
So why won’t people shy away from paying taxes?
So we can see that there is not just double taxation but multiple times taxation on the same income.
Now what if the government eases these multiple taxes and imposes a single tax on any kind of income received ( just like GST incase of indirect tax) by an individuals. Also instead of the current tax slabs we have a tax exempt status for anyone earning less than Rs. 12,00,000/- per year and 10% for those earning over Rs. 12,00,000/- per year. There will be a lot many more people willing to declare their true incomes and pay taxes and avoid the trouble of avoiding taxes.
So why haven’t successive governments of different political parties thought of implementing this strategy?
1. They probably think that people will still continue to avoid taxes, which is unlikely in my opinion. Because people will prefer to sleep well at night and not worry about the tax man and the chartered accountants (whose integrity should be seriously questioned).
2. The government may think that they may not collect sufficient taxes. This is untrue because business owners and professionals account for most of the income in the country and not the salaried class. Just by bringing the entire 800 million people, ie. 100% of the workforce under the tax umbrella, the government is more likely to earn higher tax income than it is currently doing. And all this will happen with the willing cooperation of the income earners.
3. The successive governments and their tax collectors probably don’t want to stop tax evasion, as they are being compensated personally by the tax evaders. If the people start paying taxes honestly, how will the people in authority get their dues.