Expanding the Tax Base in India: A Journey Towards Reducing Per Capita Tax Burden

"How to pay zero income tax? Simple. Grow grass at home. Call your HR and say you don’t want a salary anymore. Sell that grass instead and take home your salary as agriculture income." This recent WhatsApp joke, while humorous, highlights a fundamental issue in India's tax system: the lengths to which people will go to avoid paying taxes.

In a nation of over 144 crore people, only about 2.1 crore individuals pay income tax. This scenario places a heavy burden on a small segment of the population. The story of India’s tax system is one of contrasts and potential for change, a journey from a narrow tax base towards a broader, more inclusive system.

The Tale of India’s Taxpayers

Once upon a time, in the pre-2014 era, India's tax base was even narrower. Only about 3.8 crore people filed income tax returns, with fewer actually paying taxes. The narrative began to shift post-2014, under Prime Minister Narendra Modi's leadership. By 2023, this number had risen to 7 crore, although only about 2.1 crore were paying taxes​ (PIB)​​ (mint)​. This still translates to just 1.5% of the population, a figure that starkly contrasts with developed nations where a significant portion of the population contributes to the tax system.

The Current Scenario

Population: 144 crore
Income Tax Filers: 7 crore
Income Tax Payers: 2.1 crore (1.5% of the population)

The Challenge: A Narrow Tax Base

The current tax system in India is heavily skewed:

Few Direct Taxpayers: Only 2.1 crore individuals pay income tax.
Indirect Tax Reliance: The broader population contributes through GST, an indirect tax applied to goods and services.

This scenario creates a high per capita tax burden for those who do pay income tax, leading to a call for reform and broader participation.

Middle-Class Grievances

The middle class, a significant portion of the honest taxpayers, often voices a common grievance: despite paying taxes diligently, they feel they don't get enough "bang for their buck" in terms of public infrastructure and services. While the buoyancy in tax collections has increased during the BJP era under Modi, it has not yet reached a level robust enough to significantly reduce the per capita tax burden​ (PIB)​.

The Indian Psyche: Tax Avoidance and Service Expectations

The typical Indian businessman epitomizes the psyche of avoiding taxes by any means while simultaneously demanding high-quality public services from the government. This paradox creates a challenging environment for tax reform. Moreover, the tax revenue translating to tax expenditure often encounters numerous leaks, raising questions about the efficient use of funds by both taxpayers and non-taxpayers.

Farmers and Tax Exemptions

Farmers form a significant part of the Indian economy and are exempt from paying taxes on all income. This exemption extends even to high-earning large landowners, who can own hectares of farmland and still pay zero tax. This situation adds another layer of complexity to the tax base issue.

Leading Economists' Unconventional Proposals

Leading economists such as Mr Subramanian Swamy, who has always held an anti-establishment stance, suggested unconventional points like abolishing income tax and replacing it with a banking transaction tax. The idea is to allow people to spend more and generate revenue through transactions. While this is an interesting concept, it requires careful consideration and analysis of its potential impact on the economy​

The Vision: Broadening the Tax Base

The goal is clear: reduce the per capita tax burden by increasing the number of taxpayers. To achieve this, India must undertake a series of strategic actions.

Simplifying Tax Compliance

• Streamline the tax filing process.
• Reduce the complexity of tax laws.
• Implement user-friendly digital platforms for tax filing.

Increasing Awareness and Education

Launch awareness campaigns about the importance of paying taxes.
Highlight the benefits of a broader tax base for public services and infrastructure.

Leveraging Technology

• Use data analytics to identify potential taxpayers.
• Implement automated systems for better tracking of financial transactions.

Incentivizing Compliance

• Offer tax incentives for timely and accurate filing.
• Provide rewards for long-term compliance.
• Learning from Developed Nations

In countries with advanced economies, a much higher percentage of the population pays income taxes:

• United States: Approximately 47% of the population.
• United Kingdom: Around 55% of the population.
• Germany: About 50% of residents​ (PIB)​​ (mint)​.

These figures starkly contrast with India’s 1.5%, indicating the potential for substantial reform.

Historical Context: Pre and Post-Modi Era

Pre-2014: Approximately 3.8 crore income tax filers.
Post-2014: Increased to 7 crore filers, with 2.1 crore paying taxes​ (PIB)​.
This growth signifies progress, yet there remains a significant journey ahead to achieve a broader tax base.

Aligning the Wealth and Tax Pyramids

India’s wealth distribution shows a concentration at the top, while the tax contribution is narrow at the base. Aligning these pyramids involves broadening the tax base to ensure a fairer distribution of the tax burden.

Conclusion: A Call for Collective Participation

The story of India’s tax system is one of transformation. To reduce the per capita tax burden, the nation must embrace a broader tax base. If more people participate in paying taxes, the individual burden will decrease, making the system fairer and more efficient. It’s like an insurance plan: as more people buy in, premiums go down. Similarly, as more people pay taxes, the per-head tax will be reduced, benefiting the entire nation.

By fostering a culture of compliance, leveraging technology, and simplifying processes, India can embark on a new chapter in its economic story. Collective participation is key to a cleaner, healthier, and more prosperous India