Why do only 5% of Indians pay income tax?

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In today’s daily Read Section, you will read Why do only 5% of Indians pay income tax?

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The Story

It was madness on July 31st. Everybody was scampering to file their returns. People tallied their income, scoured through exemptions, calculated the taxes they were liable to pay and made the submission (including payment if any) to tax authorities. Some people expected the government to postpone the deadline. But there wasn’t any leeway. So if you haven’t yet filed your income tax returns, then please do it quickly. The penalties and the added interest could quickly add up otherwise.

But that aside, another question always crops up during this time.

How many people pay their taxes? And how many people actually file their returns?

Well, not a lot it seems. Around 5.8 crore people have filed their returns so far. And it’s safe to say that there could still be another 1–2 crore people who may have paid their taxes but haven’t filed the returns yet. So if you tally all that, you’ll see that a measly 5% of Indians actually pay tax. A maximum of around 8 crore people out of 130 crore Indians. It does sound quite odd, doesn’t it? Such a small portion of people bearing this heavy burden. In fact, you can see why news reports constantly put out articles with sensational headlines claiming that it’s the honest middle-class taxpayer footing the bill every single time.

However, that assessment isn’t entirely accurate. For starters, yes, there’s a small subsection of people that do pay a large portion of all the income tax receipts the government generates each year. But that doesn’t necessarily mean everyone else is dishonest.

First, the comparison with 130 crore Indians is misleading. Right now, only about 40% of India’s population is currently employed or looking for work. So that cuts the 130 crore figure by more than half. Second, looking for work isn’t the same as being gainfully employed. These people may not have had a job for a long time. So in effect, you should cut the figure by a lot more than just 60%.

Next, of those gainfully employed, you’ll see that most people don’t actually make a lot of money.

Some estimates suggest that only 3% of Indians take home an annual salary of more than ₹5 lakhs. In fact, the top 10% of Indians have an annual income of just ₹3 lakhs! And the ₹5 lakhs threshold is extremely relevant because the government exempts all those who make less than ₹5 lakhs. They don’t have to pay a tax on their income. They’re legally not obligated to. So it’s not their fault. It’s the government’s doing.

Also, many have argued that this threshold may be on the higher side.

The threshold of ₹5 lakhs is actually over 3 times the per capita GDP of the country. For context, it’s just 1.1x in Indonesia, 0.9x in Mexico, and 0.4x in the Philippines. Their threshold is set at a significantly lower level, meaning the government can capture more people in its tax net.

Then there’s agricultural income. A good chunk of Indians are employed in the agricultural domain and while most of them struggle to make a living, there are a few who take home a fairly decent sum. All agricultural income is exempted, and that leaves even more Indians out of the tax net.

Finally when you see headlines stating “only 5% of Indians pay tax”, that’s misleading too. They pay tax, just not on their income. When they buy a pack of biscuits, they pay GST. When they go buy fuel, they pay taxes. When they consume most things, they pay their fair share, via indirect taxes. So we have to account for that too.

But does that mean there’s zero deception here?

Of course. A lot of people don’t file their taxes because they still believe they can get away with it. Even others misreport their income, claim fraudulent deductions and pay less than their fair share. So clearly it’s an ongoing issue. But you don’t solve this problem by demonising the others. A better approach perhaps is to educate people on how tax proceeds actually help build the country. And for the government to show results. This could help spur behavioural change. It could help India widen its tax base.

Until then…


Ditto Insights: Saving on Taxes

Nobody likes to pay taxes and if you felt like you paid way too much in taxes this year, you should definitely consider buying insurance. You can save a lot of money this way and we will explain how:

1. Health Insurance:

Under section 80D, you can save up to 1 lakh in taxes depending on your age.

Let’s say you’re under 60 and paying premiums for yourself and your family (spouse & children). In this case, you can avail up to ₹25000 in tax deductions. Now add your parents to this and you can save even more. How much? you ask.

If they’re under 60, you save ₹50000.

Over 60, and you save ₹75000.

In case both you and your parents are 60+, you can save ₹1 lakh.

2. Term Insurance

Term insurance is quite literally a lifesaver. But you can also save up to 1.5 lakhs in taxes by availing deductions under Section 80C.

3. TDS:

If you’re a working professional, you can boost your in-hand salary by declaring your term & health insurance premiums to your HR. This reduces your taxable income or “TDS / Tax Deducted at Source”.

And hey, if you’re looking to buy health or term insurance, talk to our advisors for free today. You’ll have some of the best advisors at your fingertips. Link here.

Until next time…


Source:
Website: https://finshots.in/
Link to Native Article: https://finshots.in/archive/why-do-only-5-of-indians-pay-income-tax/


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