Income Tax Disparity in India: 0.3% of Adults Bear 76% of Tax Burden

27 Oct, 2023

Income Tax Disparity in India: 0.3% of Adults Bear 76% of Tax Burden

"India's Evolving Income Tax Landscape: A Closer Look at Compliance and Taxpayer Demographics"

Over the past decade, India has seen remarkable progress in its income tax landscape, with an 8% Compound Annual Growth Rate (CAGR) in total taxpayers, reaching a significant 71 million individuals. This growth can be attributed to improved compliance efforts, although it still represents just 6.3% of the country's adult population.

One noteworthy development is the declining percentage of individual tax filers who are actually paying taxes, which has dropped to 33%. This decline can be attributed to the availability of higher rebate options, as revealed by a study conducted by Jefferies, a global investment bank.

Another significant shift is the increasing share of individual incomes in the country's Gross Domestic Product (GDP), which has risen from 15% in FY12 to 24% in the present day. This shift has played a role in driving higher compliance rates.

Currently, India boasts a population that is among the world's largest, yet only a small fraction contributes to the nation's tax revenue. Data shows that 66.5 million individuals pay personal income tax, equivalent to 4.8% of the total population and 6.3% of the adult population. What's striking is that a mere 0.3% of the adult population, comprising 3.2 million individuals, accounts for a substantial 76% of the total personal income tax receipts collected by the government.

Despite a steady rise in overall compliance, the number of personal income tax payers remains relatively small in comparison to the total population. In FY12, only 31 million individuals paid income taxes, whereas this figure has now surged to 71 million in FY23.

Jefferies Research conducted a comprehensive analysis of personal income tax data over a decade, highlighting a CAGR of 8% in the number of income tax filers, totaling 68 million. In contrast, corporate income tax payers grew at a slower 5% CAGR, reaching 1.026 million from 581 in FY12. The decrease in the percentage of individual tax filers actually paying taxes can be attributed to higher rebate options.

A significant finding from this analysis is the disproportionate contribution of the top 5% of income tax filers, who represent a mere 0.3% of the adult population but contribute an astounding 76% of the total personal tax revenue.

Interestingly, personal income tax filers have outpaced corporate tax filers in terms of growth over the period from FY12 to FY21. Personal income tax filers experienced an 8% CAGR, reaching 68 million, while corporate tax filers grew at a slower 5%, totaling 1 million in FY21. This shift in growth rates, combined with corporate tax cuts, has led to a significant increase in the share of individuals in total direct taxes, rising from 33% in FY12 to 50% at present. As a percentage of GDP, personal income taxes have also increased from 1.9% in FY12 to 3.0% in FY24E, according to Jefferies.

Despite the positive growth in individual tax collections and filings, the analysis reveals that the number of IT return filers accounts for just 6.3% of the total adult population. Moreover, only one-third of these filers, approximately 23 million individuals, are actually paying taxes. The concentration of tax liability remains significant, with the top 5% of income earners responsible for 76% of personal income tax payments, a trend that has remained relatively stable over the past nine years.

The Indian government has implemented various measures, including demonetization, the rollout of the Goods and Services Tax (GST), and the usage of PAN cards for large transactions, to enhance tax disclosures. The ongoing formalization of the economy and the shift of labor from agriculture to salaried jobs are expected to contribute to the expansion of the income tax base in the long run.