It’s often said that only a few Indians pay taxes. That's entirely incorrect. Let’s see how!
In September 2020, the government told the Parliament that only 1% of the population pays income tax. In his response to a question in Lok Sabha, the then Minister of State for Finance, Anurag Singh Thakur, informed that for the financial year 2018-19 till February 2020, 5.78 crore income tax returns were filed by individual taxpayers.
Of these, only 1.46 crore individual taxpayers declared income above Rs 5 lakh. Income below Rs 5 lakh is effectively exempt from income tax. India’s population is about 140 crore, so 1.46 crore translates to 1%.
For the fiscal year 2019-20, returns were filed by individuals. On an average returns filed show zero-tax liability. This makes it 3.6 crore returns filed, translating to 2.5% of the population. That’s still miniscule.
Population under 18 years of age is not capable of earning and paying income tax. Almost 40% of the population is under 18 years of age. Excluding 56 crore of non-adult population, the ‘tax-eligible’ population reduces to 94 crore. That’s still just 4% of the population paying income tax. Just a handful.
There are two kinds of taxes, direct and indirect.
Direct tax is levied directly on a taxpayer who pays it to the government and cannot pass it on to someone else. For example, income tax, wealth tax, property tax, etc are all direct taxes.
Indirect tax is levied by the government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another.
GST is an indirect tax. It is a consumption tax.
When we buy goods or services we pay the price which is inclusive of GST. GST is collected by companies/suppliers and then deposited with the government.
It’s the same for excise duties on fuels. These are included in the price of petrol/diesel, collected by oil marketing companies and deposited with the government.
The central government’s revenue mainly consists of corporate tax, personal income tax, excise duties, customs duty and GST. Out of these, personal income tax, excise duties and GST are paid either directly or indirectly by individuals.
Direct tax collections from individuals were Rs 4.6 lakh crore in 2020-21. On the other hand, indirect taxes, including GST and excise duty, were Rs 1.4 lakh crore. Direct taxes from individuals accounted for 25%, while indirect taxes 75% of total collections.
Now indirect taxes are paid by almost everybody. Whenever you buy any product or avail any service you pay taxes, irrespective of the fact you pay income taxes or not.
Then is it fair to say that the coverage of indirect taxes is 100% of the population? No, it is not.
In India, many people exist below the poverty line and depend upon subsided ration and supplies from the government.
Pew Research Center has estimated that another 74 million people have become poor due to the pandemic. That makes it 31% of our population below the poverty line.
They may not be consuming much and thus paying GST. Excluding this from the population, around 69% of the population pays indirect taxes.
So 2.5% of the population pays income tax, which accounts for 25% of total taxes paid by individuals.
And 68.7% of the population pays GST/excise duties, which account for 75% of total taxes paid by individuals.
This means 52% of the population contributes to taxes in some form or the other. Even people who don’t pay any income tax pay consumption tax as shown below.
Often in this argument of a miniscule paying income taxes, we forget the fact that India’s per capita income is just Rs 1.28 lakh, nearly one-fourth of income which is effectively exempt. The number of income tax payers is bound to be low. However, overall tax payers (income plus consumption) is high at 52%.