By Akhilesh Tilotia & Akshata Kalloor
The fiscal choice for any country is whether it gets more incomes to tax or taxes incomes more. On the back of novel analyses on tax data, we note that the fiscal contract of Indians with their country has changed meaningfully over the last decade.
Last year, we converted the vast data sets emerging from digital tolling on India’s highways to create heat maps to get a perspective on India’s economy (bit.ly/3xJBkW7). In this article, we look at the changing base and rates in direct taxes.
Also Read Fiscal democracy Food systems under Modi 3.0 Regulating AI “O Canada”– A Distant Dream for International Students?
A look at the filers
Over time, incomes of individual direct tax filers show a move to higher brackets, even as more filers are falling into the tax net (see graphic). A part of this can rightly be attributed to higher nominal incomes. However, as we detail later, there is a large real growth in tax collections.
We note a similar steepening of the curve for other direct tax filers, too. Their number in case of direct taxes has more than doubled from 31.3 million in FY12 to 67.6 million in FY21.
Rising tax base and falling effective rates of direct taxes
We work with annual data on (a) cumulative gross total income (GTI); (b) “returned” income (RI, i.e. the incomes offered to tax in the income tax return); and (c) the total tax collected. Aggregate disclosure of GTI and RI on various heads (salary, house property, business, capital gains, and income from other sources) for various types of assessees is also available. Trend lines and proportions of these incomes against overall GDP and tax collected offer insights on how India’s income composition has changed. This data is available only till FY21.
The proportion of GTI-to-GDP has increased from 24.2% in FY12 to 35.1% in FY21. The ratio of RI to GTI has remained roughly constant at ~90%: We can hence say that the deductions as a proportion of income have not materially changed. India’s per-capita income of
~` 1.46 lakh in FY21 is significantly lower than the minimum income chargeable to tax. It is, hence, heartening to see that more than a third of the incomes are now offered to tax, up from less than a quarter a decade ago.
The ratio of tax collected to RI has fallen from 18.7% in FY12 to 15.6% in FY21, by more than 310 basis points. Lower effective tax rates are mainly driven by a fall in corporate tax rates which, in 2019, were reduced for existing domestic companies and new domestic manufacturing units. The effective corporate tax rate, basis the tax computed to be paid to RI, ranged between 30% and 35% from FY12 to FY19 but fell to 24.3% in FY21. For individuals, average effective tax rates did not change by a lot, staying between 10.4% and 10.8% over FY12-21.
Deaveraging direct taxes
Overall direct tax-to-GDP ratio has gone up from 4.1% of GDP to 4.9% over FY12-21. This includes taxes from various “persons”. In the graphic, we detail the direct tax collected as a percentage of GDP across individuals and businesses over time, juxtaposed with the average effective tax rate.
Tax refers to the tax payable as computed as per returns filed by assessees of these two categories. There are seven categories of “persons” including firms, association of persons, and Hindu Undivided Family.
Salary incomes (of individuals) constitute 55.1% of total GTI in FY21, up from 51.6% in FY12 while business income is down from 33.4% to 29.2% — a roughly 400 basis point interchange in the two largest income categories, which between them account for ~85% of overall incomes.
The numbers used in this analysis may not fully tie in with the direct tax-to-GDP ratio as detailed by the financy ministry in its annual budget documents due to many factors including changes in tax due after assessments, penalties, refunds, etc. The government’s actual collections are higher than the numbers noted here, though the trend is broadly similar.
For individuals, tax computed as due, as a proportion of GDP, increased by ~80 basis points to 2.1% of GDP in FY21 from 1.3% of GDP in FY12. This is driven both by (a) the increase in number of tax returns as noted earlier; and (b) an increase in incomes: More than four-fifths of all individual tax filers earned gross incomes of less than `5.5 lakh in FY12, this proportion was three-fifths by FY21. We note the relative stability of the effective tax rate between 10.4% and 10.8%.
For businesses, tax computed as due changed marginally by 10 basis points to 2.6% of GDP in FY21 from 2.7% of GDP in FY12. The cut in tax rates in FY20 shows up clearly in the tax-to-GDP collected from business incomes since that year.
Other caveats
We know from Budget documents that over the last three years till FY24, direct tax-to-GDP ratio has continued to rise. As data is released, it will be instructive to see if this is due to lower taxes on business incomes leading to higher tax collections, or the individual income taxes continue to contribute more.
The nature of the fiscal contract in a $10 trillion economy will be very different from the current one.
The authors are with National Investment and Infrastructure Fund.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
By Akhilesh Tilotia & Akshata Kalloor
The fiscal choice for any country is whether it gets more incomes to tax or taxes incomes more. On the back of novel analyses on tax data, we note that the fiscal contract of Indians with their country has changed meaningfully over the last decade.
Last year, we converted the vast data sets emerging from digital tolling on India’s highways to create heat maps to get a perspective on India’s economy (bit.ly/3xJBkW7). In this article, we look at the changing base and rates in direct taxes.
Over time, incomes of individual direct tax filers show a move to higher brackets, even as more filers are falling into the tax net (see graphic). A part of this can rightly be attributed to higher nominal incomes. However, as we detail later, there is a large real growth in tax collections.
We note a similar steepening of the curve for other direct tax filers, too. Their number in case of direct taxes has more than doubled from 31.3 million in FY12 to 67.6 million in FY21.
We work with annual data on (a) cumulative gross total income (GTI); (b) “returned” income (RI, i.e. the incomes offered to tax in the income tax return); and (c) the total tax collected. Aggregate disclosure of GTI and RI on various heads (salary, house property, business, capital gains, and income from other sources) for various types of assessees is also available. Trend lines and proportions of these incomes against overall GDP and tax collected offer insights on how India’s income composition has changed. This data is available only till FY21.
The proportion of GTI-to-GDP has increased from 24.2% in FY12 to 35.1% in FY21. The ratio of RI to GTI has remained roughly constant at ~90%: We can hence say that the deductions as a proportion of income have not materially changed. India’s per-capita income of
~` 1.46 lakh in FY21 is significantly lower than the minimum income chargeable to tax. It is, hence, heartening to see that more than a third of the incomes are now offered to tax, up from less than a quarter a decade ago.
The ratio of tax collected to RI has fallen from 18.7% in FY12 to 15.6% in FY21, by more than 310 basis points. Lower effective tax rates are mainly driven by a fall in corporate tax rates which, in 2019, were reduced for existing domestic companies and new domestic manufacturing units. The effective corporate tax rate, basis the tax computed to be paid to RI, ranged between 30% and 35% from FY12 to FY19 but fell to 24.3% in FY21. For individuals, average effective tax rates did not change by a lot, staying between 10.4% and 10.8% over FY12-21.
Overall direct tax-to-GDP ratio has gone up from 4.1% of GDP to 4.9% over FY12-21. This includes taxes from various “persons”. In the graphic, we detail the direct tax collected as a percentage of GDP across individuals and businesses over time, juxtaposed with the average effective tax rate.
Tax refers to the tax payable as computed as per returns filed by assessees of these two categories. There are seven categories of “persons” including firms, association of persons, and Hindu Undivided Family.
Salary incomes (of individuals) constitute 55.1% of total GTI in FY21, up from 51.6% in FY12 while business income is down from 33.4% to 29.2% — a roughly 400 basis point interchange in the two largest income categories, which between them account for ~85% of overall incomes.
The numbers used in this analysis may not fully tie in with the direct tax-to-GDP ratio as detailed by the financy ministry in its annual budget documents due to many factors including changes in tax due after assessments, penalties, refunds, etc. The government’s actual collections are higher than the numbers noted here, though the trend is broadly similar.
For individuals, tax computed as due, as a proportion of GDP, increased by ~80 basis points to 2.1% of GDP in FY21 from 1.3% of GDP in FY12. This is driven both by (a) the increase in number of tax returns as noted earlier; and (b) an increase in incomes: More than four-fifths of all individual tax filers earned gross incomes of less than `5.5 lakh in FY12, this proportion was three-fifths by FY21. We note the relative stability of the effective tax rate between 10.4% and 10.8%.
For businesses, tax computed as due changed marginally by 10 basis points to 2.6% of GDP in FY21 from 2.7% of GDP in FY12. The cut in tax rates in FY20 shows up clearly in the tax-to-GDP collected from business incomes since that year.
We know from Budget documents that over the last three years till FY24, direct tax-to-GDP ratio has continued to rise. As data is released, it will be instructive to see if this is due to lower taxes on business incomes leading to higher tax collections, or the individual income taxes continue to contribute more.
The nature of the fiscal contract in a $10 trillion economy will be very different from the current one.
The authors are with National Investment and Infrastructure Fund.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Rami G Khouri
Mort Laitner
Rachel Marsden
Donald Low
Bradley Blankenship
Ali Fathollah-Nejad
Nikkei Editorial
Abbas Juma
Michael Kwet
visit website
