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 inste and take home your salary as agriculture income." This recent WhatsApp joke, while humorous, highlights a fundamental issue in India's tax system: 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 population. story of India’s tax system is one of contrasts and potential for change, a journey from a narrow tax base towards a broer, more inclusive system.

Tale of India’s Taxpayers

Once upon a time, in 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. narrative began to shift post-2014, under Prime Minister Narendra Modi's leership. By 2023, this number h risen to 7 crore, although only about 2.1 crore were paying taxes​ (PIB)​​ (mint)​. This still translates to just 1.5% of population, a figure that starkly contrasts with developed nations where a significant portion of population contributes to tax system.

Current Scenario

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

Challenge: A Narrow Tax Base

current tax system in India is heavily skewed:

Few Direct Taxpayers: Only 2.1 crore individuals pay income tax.
Indirect Tax Reliance:  broer 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, leing to a call for reform and broer participation.

Middle-Class Grievances

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

Indian Psyche: Tax Avoidance and Service Expectations

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

Farmers and Tax Exemptions

Farmers form a significant part of 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 ds anor layer of complexity to tax base issue.

Leing Economists' Unconventional Proposals

Leing 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. 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 economy​

Vision: Broening Tax Base

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

Simplifying Tax Compliance

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

Increasing Awareness and Education

Launch awareness campaigns about importance of paying taxes.
Highlight benefits of a broer 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 vanced economies, a much higher percentage of population pays income taxes:

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

se figures starkly contrast with India’s 1.5%, indicating 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 re remains a significant journey ahe to achieve a broer tax base.

Aligning Wealth and Tax Pyramids

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

Conclusion: A Call for Collective Participation

story of India’s tax system is one of transformation. To reduce per capita tax burden, nation must embrace a broer tax base. If more people participate in paying taxes, individual burden will decrease, making 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, per-he tax will be reduced, benefiting 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