The word ‘taxpayer’ is routinely used by middle class Indians to refer to those who pay income tax, but the biggest chunk of the government’s tax revenue actually comes from goods and services tax (GST), which is paid by even the poorest. This is followed by corporation tax, paid by corporates on their profits, though individual income tax is a close third.

The 2022-23 Budget estimate (BE) of revenue earned from GST was Rs 7.8 lakh crore compared to Rs 7.2 lakh crore from corporation tax and Rs 7 lakh crore from income tax. The actual revenue in 2020-21, the Covid year, saw GST netting Rs 5.5 lakh crore. Corporation tax yielded just Rs 4.6 lakh crore — lower than income tax collection of Rs 4.9 lakh crore, thanks to the impact of the pandemic on corporate revenues and profits.

Indirect taxes, which are paid by all citizens, include GST, customs & excise duties and the erstwhile service tax. In India, indirect taxes constitute about half of total taxes collected.

Tax systems with a high component of indirect taxes are considered regressive since the burden of such taxes falls on everyone irrespective of their capacity to pay unlike direct taxes such as taxes on income or on profits of companies, which only apply to those with incomes above a threshold or to firms that are profitable.

Developed nations mostly collect tax revenues from direct taxes. “Among Organisation for Economic Co-operation and Development (OECD) countries, indirect taxes (such as value added tax and GST) account for about one-third of total tax revenues. The bulk of their tax revenues (roughly 66%) comes from direct taxes such as income, corporate, property, payroll taxes, etc,” points out Reetika Khera, professor of economics at the Indian Institute of Technology-Delhi.

At the time of independence, India was struggling to generate revenue as there were very few corporates and only a small tax base of individual taxpayers. Hence, through the 1950s and right up till the 1990s, up to 80% of revenue was generated from indirect taxes.


Subsequently, the share of indirect taxes dropped to its lowest (41%) in 2009-10, but has risen since then, though BEs suggest this will change. Also, the share of individual income tax within direct taxes has risen after falling.

According to the receipts in Budget 2022-23, there were 6.3 crore individuals who filed income tax returns for the financial year 2019-20. The annual report of the periodic labour force survey for the period from July 2020 to June 2021, released in June 2022, said only 41.6% of India’s total population, or 56 crore, people are “usually employed” or looking for work. That means only about 11% of the labour force file income tax returns.

With poor quality employment and low wages, the proportion of those earning more than Rs 2.5 lakh per annum or about Rs 21,000 a month, the level above which income tax applies, is very small.

According to government’s data in assessment year 2018-19 (the last for which such data is available) a little over 40% of individuals filing income tax returns (5.5 crore people) had zero tax liability. Thus, only about 3.3 crore individuals actually paid any income tax, just under 6% of the labour force.

There would of course be many evading taxes, but the bulk of India’s population simply doesn’t earn enough to fall within the tax bracket. Meanwhile, the tax rate on corporates has steadily come down from 50% in the 1990s to 30%, which is in line with many large economies — about 25% in China and the US, and about 30% in Germany and Japan.

India tries to keep corporate taxes low to stay competitive internationally. But this, along with a very low individual income tax base, means boosting the share of direct taxes in the total tax kitty. And that’s a tall ask.


India can afford to tax less

The Centre is expected to close the year with higher than budgeted tax collections during 2022-23, marking the second straight fiscal year of the actual collections being more than the BE.

During the last 22 years, there have been only two occasions — 2006-07 to 2007-08 and 2015-16 to 2017-18 — when the actual collections have been more than the BE during successive years.

Against a BE of Rs 15.5 lakh crore, the Centre’s net revenue collections (after transfers to states) were estimated at over Rs 18 lakh crore, according to the provisional data available with the Controller General of Accounts.

During the current fiscal year too, direct tax and GST collections are on course to beat the BE. For instance, during the fiscal year up to January 10, direct tax collections were estimated to be at 87% of the full-year target, making it almost certain that the finance minister will revise the target upwards when she presents the revised estimates in Parliament on Wednesday.

Similarly, with average monthly collections of Rs 1.49 lakh crore, GST too is on course to beat the full-year estimate despite a slowdown in imports.

At the start of the financial year, finance ministry officials had suggested that the estimates for 2022-23 were conservative. Economists are now keeping an eye on the BE for next year, given that it may not be possible to sustain the tax buoyancy that has been seen for two straight years following the pandemic.

By editor

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