Data shared by the government in Parliament and data from the CBDT indicates the number of personal income taxpayers has more than doubled in the last 10 years. The data also indicates that the share of government employees/pensioners among the personal income taxpayers category also doubled during the same period.
Taxes are essential resources whose mobilisation and maximization are crucial to governments in order to pay, among other things, for the development needs of the underprivileged and poorer segments of society as well as financing the crucial economic, and infrastructural needs. In addition to the social objective behind taxation, taxes also help in reducing income and wealth disparities. Different taxpayer groups with different sources of income are charged different tax rates.
In today’s story, we look at some of the trends in the income tax collection in India. It has to be noted that unless specified, all years correspond to fiscal years and not assessment years.
Direct taxes account for half of the total tax revenues.
Direct taxes are defined as the taxes whose liability cannot be transferred to any other person except on whom the tax is levied. Taxes such as income tax, corporate tax, capital gains tax, security transaction tax and wealth tax come under direct taxes in India. The data from the Central Board of Direct Taxes (CBDT) indicate that direct taxes account for more than half of the total tax revenues in India. The proportion of direct taxes out of the total taxes was highest during 2009-10 at 60%, thereafter which the share is wavering between 50 to 55%.
Personal taxpayers in 2020-21 still below the pre-pandemic level
A broad categorization of total direct taxpayers in India is the corporate taxpayers and non-corporate (personal) taxpayers. The number of taxpayers paying corporate tax has been rising steadily from 6.2 lakh in 2012-13 to 9.7 lakh in 2020-21. This rise is steady and consistent even during the COVID-19 pandemic time. On the other hand, the number of personal income taxpayers recorded the highest numbers in 2018-19, with 685.4 lakh taxpayers from a meager 282.21 lakh in 2012-13. However, the number fell to 661.9 lakh in 2019-20 and then rose to 684.4 lakh in 2020-21. This is still below the level reached before the pandemic.
Personal Income Taxpayers above 10 lakh slab under ‘individuals’ category grew by more than 250% during last seven years.
‘Equity’ remains one of the key fundamental principles governing tax policy. Equity applies in both vertical and horizontal directions. Horizontal equity refers to taxing equally abled citizens with equal taxes, while vertical equity means taxing citizens with higher abilities are taxed comparatively higher. To achieve these objectives, a slab system of taxation was implemented. These are not rigid and change depending on the budgetary announcements. A new tax regime for individual taxpayers was made applicable from Assessment Year (AY) 2021-22 and for corporate taxpayers from AY 2017-18.
As per the old tax regime, the income for individual personal income taxpayers is divided into three slabs – 0 to 5 lakhs, 5 to 10 lakhs, and above 10 lakhs. The data of individual taxpayers in each slab has grown considerably from 2014-15 to 2020-21. The ‘above 10 lakh’ tax slab registered the highest growth rate of 259%, followed by ‘5 to 10 lakh’ at 164%, and ‘0 to 5 lakhs’ at 27% during this period.
One-fifth of the personal taxpayers’ are government employees/pensioners.
Out of the total personal income taxpayers in India, the share of Government employees/pensioners has been rising steadily. The total number of government employees/pensioners under the personal taxpayers’ category was 28 lakh in 2012-13, which rose to 137.4 lakhs during 2018-19. The number as of 2020-21 stands at 128.2 lakh. The parliamentary answer does not mention if the number includes both central and state government employees or only central government employees. However, if one looks at the number of central government employees as per the pay and allowances report of the Department of Expenditure, this number could include government employees of both the central & state governments.
On the percentage share, it was 9.97% in 2012-13, reached a highest of 20.05% during 2018-19, and thereafter fell to 18.73% in 2020-21. Nevertheless, there is almost a double growth in the share of government employees paying taxes.
Cost of tax collection is the lowest since last two decades.
A sound policy advocates for a greater tax collection with minimum leakages and expenditure incurred on the collection of such taxes. Simplification of the tax regime is one of the ways in which leakages and expenditures on tax collections can be minimized. The percentage of the total expenditure incurred on tax collection to the total collections gives the cost of collection. Owing to the measures initiated by successive governments in simplifying tax regimes, the cost of collection has come down significantly. During 2000-01, the cost of collection stood at 1.36%, which declined gradually to 0.54% during 2007-08. It rose again and fluctuated between years, arriving at 0.53% in 2021-22, the lowest in the last two decades.
Further, a Government task force submitted a draft report on the income tax reforms in 2019 to the Finance Ministry to simplify the tax regime in India.
New tax regimes – A push to minimize revenue impact of tax incentives?
Any tax law and its administration’s main goal is to generate income in order to pay for government spending. The total tax base and the effective tax rates have a major impact on the amount of money raised. The key determinants of these two variables include a variety of policies, such as specific tax rates, exemptions, deductions, refunds, deferrals, and credits among others.
Since budget 2006-07, the government has been releasing statements on the revenue impact of these tax incentives. It is aimed at bringing transparency to the tax policy and tax expenditures. The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions, and similar measures.
The data from 2012-13 indicate that there is a steady increase in the revenue impact of tax incentives for all categories of taxpayers. For individuals and HUFs, and non-corporate taxpayers (firms, Association of Persons (AoPs), Body of Individuals (BoIs), the revenue impact of tax incentives grew by 405% and 80% respectively from 2012-13 to 2019-20. The new tax regime was introduced in 2020-21, which reduced the revenue impact of these two categories of taxpayers.
Similarly, the growth for the corporate sector between 2012-13 to 2018-19 is 87%, and thereafter which, there is a constant decline in the revenue impact. The budget document for 2023-24 notes the encouraging trend in the corporate sector towards the adoption of a new concessional tax regime by moving away from deductions and exemption regimes.
Featured Image: Trends in income tax collection