Only 5.5% who earn are tax payers: Economic Survey

India is far from being a full tax-paying democracy with about 5.5 per cent of the people who earn paying tax and only 15.5 per cent of the net national income being reported to the tax authorities, according to the Economic Survey tabled in the Parliament on Friday.

The survey estimated that just four per cent India’s voters are taxpayers, though it should be closer to 23 per cent, and 85 per cent of the net national income fall outside the tax net.

The tax to GDP ratio at 16.6%, as a result, is well below that of the emerging market economies of 21 per cent and OECD average of 34 per cent. The survey, however, pointed out that the democracies with higher ratios took a long time to strengthen tax capacity. “Any harsh judgement of India’s performance must be tempered by historical differences in the evolution of India compared with other democracies.”

On the expenditure side, India’s spending on human capital, education and health, to the GDP ratio is the lowest among BRICS and lower than the OECD and emerging market economies averages. They are in fact, lower than those of comparable per-capita GDP economies such as Vietnam, Bolivia and Uzbekistan.

To widen the tax net and raise revenue for spending on India’s human capital development, the survey called for bringing rich farmers into the tax net, raising property tax rates and phasing out tax exemptions.

There should be “reasonable” taxation of the better-off, regardless of the source of their incomes, whether it is from industry, services, real estate, or agriculture, Chief Economic Advisor Arvind Subramanian told reporters after the survey was tabled.

The survey also seeks to address the question French economist and author of best-selling book Capital in the Twenty-First Century Thomas Piketty raised during his recent trip to India: Should not Indian elite pay more taxes to provide for greater spending on health and education?

If the UPA Government had not raised in the 2012-13 the threshold level of personal income tax, the survey calculated that an additional 1.65 crore income tax payers would have got incorporated.

The tax-GDP ratio would have been 0.32% higher as Rs.31,500 crore additional tax revenue would have been collected.

The survey also seeks to analyse the levels of inequality in India, which Prof. Piketty said during his visit, he is unable to assess owing to unavailability of data.

According to the survey fast growing years in the 2000s were in fact associated with rising inequality at the very top end of the Indian income distribution.

As in many countries, there has been a growing concentration of income at the top: in 2013-14.

The top one per cent, 0.5 per cent and 0.1 per cent of people in the overall income distribution (the three highest income groups) accounted for 12.4 per cent, 9.4 per cent and five per cent of the entire income of the Indian economy.

At these levels, inequality in India, it said, is comparable to that in the U.K. and lesser than in the United States.

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Rich feed off subsidies worth over Rs. 1 lakh crore: Economic Survey

India’s rich feed off subsidies worth over Rs. 1 lakh crore a year that are meant for the poor, according to the Economic Survey. And this figure only considers the subsidies on six commodities, two public utilities — the Railways and electricity — and one small savings scheme, the Public Provident Fund.

“There are a fair amount of government interventions that help the relatively better-off in society. In many cases, this takes the form of explicit subsidisation, which is surprisingly substantial in magnitude,” the Survey said in a provocatively titled chapter ‘Bounties for the Well-off.’

The Survey classified the population on the basis of consumption data collected by National Sample Surveys. “Poor refer to the bottom 30 per cent of the population and the rich the top 70 per cent,” it said in a footnote. This categorises a sizeable portion of the non-poor as ‘rich’.

“These numbers are striking and have one policy implication: any tax incentives that are given, for example, for savings, benefit not the middle class, not the upper middle class but the super-rich who represent the top 1-2 per cent,” the Survey added.

Chief Economic Adviser Arvind Subramanian, the Survey’s lead author, argued that most commodities primarily consumed by the rich have a very low tax rate, in effect subsidising them at the cost of the poor. For example, the rich consume 98 per cent of the gold in the country, and yet gold is taxed at only 1-1.6 per cent (the Centre and the States combined).

The rich avail of an 88 per cent subsidy on kerosene, amounting to Rs. 5,501 crore and 86 per cent subsidy on LPG, amounting to Rs. 40,151 crore.

ATF tax lower than that of petrol

To arrive at the quantum of subsidies availed of by the rich, the Economic Survey assumed the average tax on normal commodities at 19 per cent, the Revenue Neutral Rate for the GST as recommended by the Subramanian panel, and a 50 per cent tax on energy-related commodities that serves as an “appropriate carbon tax.”

The effective subsidy availed by the rich, as calculated by the Survey, is the difference between this tax rate (19 per cent or 30 per cent) and the actual subsidy, measured as a negative number, or the (positive) tax rate on that commodity or service.

Some commodities are subsidised more for the poor than the rich, such as railway tickets (since there are different categories of tickets), but even here, the rich avail of a subsidy of 34 per cent, according to the Survey. Similarly, the tax structure has resulted in aviation fuel being cheaper per litre than petrol and diesel. “Aviation fuel is taxed at about 20 per cent (average of tax rates for all states), while diesel and petrol are taxed at about 55 per cent and 61 per cent (as in January 2016). The real consumers of ATF are those who travel by air, who essentially are the well-off,” the Survey said.

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