How Much Have You Paid in Taxes Over the Last 10 Years?

If You’re Not Rich, You Likely Contributed More, Suggests a Report

Newsreel Asia Insight #192
April 15, 2024

Over the last decade, the tax burden on India’s middle and lower-income groups has significantly increased, while the nation’s wealthiest have continued to pay disproportionately less, revealing a deepening divide in fiscal responsibility amidst modest overall tax revenue growth, according to a report by the Financial Accountability Network–India.

In its 2019 election manifesto, the ruling Bharatiya Janata Party (BJP) promised to improve how taxes are collected and to expand the tax base, which is the total amount of assets or income that can be taxed. They claimed that their policies had increased the tax-to-GDP ratio – the proportion of the country’s gross domestic product that is collected as taxes – from 10.1% to 12%. This increase in taxes, they said, was used to improve infrastructure and help the poor.

However, the actual data tells a different story, according to the 10-year report card on taxation published by the Financial Accountability Network–India. Given below is a summary of the report, accompanied by some explanations.

The tax-to-GDP ratio only increased to 11.7%, not the 12% claimed, and still lower than the high of 17.9% reached in 2008. This indicates that the government’s ability to collect taxes has not improved as much as they claimed. Additionally, the widening gap between direct taxes – taxes directly paid to the government like income tax – and indirect taxes, or taxes paid on goods and services, has placed a heavier burden on poorer people.

Indirect taxes, such as sales tax, value-added tax (VAT), or goods and services tax (GST), are levied on goods and services rather than on income or profits. Because these taxes are applied uniformly to all consumers regardless of their income levels, they can disproportionately affect the poor. The government often celebrates high GST collections – anything above 1 trillion rupees – as a success, overlooking its impact on poorer citizens.

The poor generally spend a larger proportion of their income on consumption compared to the rich. This is because most of their income must go toward meeting basic needs like food, clothing and shelter. When indirect taxes are applied to these goods and services, the poor end up paying a larger share of their income in taxes than wealthier individuals who can save or invest a greater portion of their income.

Indirect taxes are considered regressive, meaning they take a larger percentage of income from low-income earners than from high-income earners. This regressive nature worsens economic inequality because the tax rate does not adjust based on the ability to pay. Everyone pays the same tax rate on goods and services, regardless of their financial situation.

Wealthier individuals often have more options to minimise their tax burden through tax planning strategies and investments. The poor, however, have fewer financial options and must pay taxes on almost all of their expenditures because their spending is largely on necessities, which are often taxed.

Goods and services consumed by lower-income groups tend to be more price inelastic, meaning that their consumption does not decrease significantly with price increases. For example, basic staples like rice or bread are essential, and people will continue to buy them even if prices go up due to taxes. This further ties the hands of the poor, as they cannot simply stop purchasing these essentials to avoid the tax.

The poor often lack access to cheaper alternatives or tax-exempt goods, which might be more readily available to wealthier consumers. For instance, buying in bulk to save money or accessing tax incentives through large purchases or investments are typically out of reach for the poor.

While 160 countries have implemented GST, the effectiveness and impact of GST can vary greatly. The report points out that just because GST works in countries like France – the first to implement GST in 1954 – doesn’t mean it works as well in India. For example, the U.S. doesn’t use GST, and Malaysia actually repealed it in 2018 due to its negative impacts.

Further, the report states, “On comparing the GST rates around the world, India has a rate greater than the other nations that have GST mechanisms” – more than France, U.K., Singapore and Canada.

The report notes that GST was expected to benefit poorer states by reducing inequality between states. However, the reality is that it has harmed the unorganised sector, which is larger in poorer states, thus worsening their economic conditions.

In 2019, the government significantly reduced corporate taxes, which was supposed to boost investment by companies. However, this led to a greater tax burden on the working and middle classes, as the government began relying more on income tax from individuals to make up for the shortfall.

The report points out that while income tax collections have increased significantly, the increase in corporate taxes has not kept pace. This shift places more of the financial burden on ordinary citizens rather than corporations.

Despite a large number of millionaires in India, very few declare incomes that would match their wealth, suggesting widespread tax evasion among the very rich.

The report contrasts these statistics with the tax data from the Assessment Year (AY) 2018-19, where only 29,002 individuals declared an income above 5 million rupees. This does not correspond to the number of millionaires reported.

This discrepancy suggests that there is significant tax evasion among the wealthy. The assumption made in the report is if these millionaires had declared an income that was a mere 10% of their wealth, the number of individuals reporting high incomes would be much higher. The low number of such declarations implies that many are likely not reporting their full incomes, thereby evading taxes.

The evasion of taxes by the wealthy means that the government collects far less revenue than it could, which impacts its ability to fund public services and infrastructure. This shortfall has broader implications for economic equality and societal welfare.