Widening India’s tax base has been a big challenge for the government, present and past alike. Ahead of every budget, this becomes a key deliberation as finance ministry officials sit down and decide on the budget proposals. Most experts would suggest the usual measures like lowering tax rates, removing all exemptions, technology-enabled monitoring, etc., to expand the tax base. However, in the long term, these measures have limited utility. The problem lies in India’s low per capita income that keeps a large part of India’s population out of the income tax net.
India’s total tax (including those collected by states) to GDP ratio has been around 17% for over a decade compared to the average tax-to-GDP ratio of 33% in OECD countries. The contribution of direct taxes (individual and corporate income taxes) in total tax collected in the country is just about 33%, which means two-thirds of the total taxes are collected through taxes on consumption. Now, consider the number of taxpayers in India. Finance Minister Nirmala Sitharaman in March this year had informed Parliament that there were 8.22 crore taxpayers in the country in the assessment year 2020–21. Those 8.22 crore also include those who might have only filed returns but not paid any taxes.
That is a minuscule number of taxpayers in a country with a population of 1.4 billion. This issue gets debated over and over on various platforms, with many alluding to massive tax evasions as the reason for such a low number of taxpayers in the country. While there could be some evasions, the demographic realities of India might paint a different picture. In a country with over 900 million people in the working age category, the labour force participation is just around 500 million or even lower. Recent studies have shown that only 10% of those working earn more than `25,000 a month. With the income threshold raised to `5 lakh per annum for paying taxes, it is very likely that the majority of the labour force would be out of the tax net. While the government has successfully used tools like TDS (tax deducted at source) and non-filers monitoring system to cast the tax net wider, these tools have a limited utility unless the government devises ways to increase India’s per capita income, which is a paltry $2,200 (India ranks below 140 countries in per capita income).