India’s Taxpayer Population Grows, but Compliance Still Low
India, known for its massive population, has a surprisingly small number of individuals who pay taxes. Recent data reveals that only 4.8% of the total population and 6.3% of the adult population in India are personal income taxpayers. Among this group, a mere 0.3% of adults, or 3.2 million individuals, contribute a staggering 76% of the government’s total personal income tax receipts.
While compliance has been steadily improving, the number of personal income taxpayers remains relatively small. In FY12, only 31 million individuals paid income taxes, but this figure has now risen to 71 million in FY23. A study conducted by Jefferies Research, a global investment bank, shows that the number of income tax filers has experienced a compound annual growth rate (CAGR) of 8% over the past ten years, totaling 68 million. In contrast, the number of corporate income tax payers has grown at a slower rate of 5% CAGR, reaching 1 million in FY21. The drop in the percentage of individual tax filers who actually pay taxes can be attributed to the availability of higher rebate options.
One striking finding from the analysis is that the top 5% of income tax filers, comprising only 0.3% of adults, contribute 76% of the total personal tax collected. The number of taxpayers with higher incomes, exceeding Rs 0.5 million, Rs 1.5 million, and Rs 5 million, has seen significant growth, with a CAGR of 17-20%. This rise indicates a growing compliance among individuals, as the share of individual filers’ incomes has increased from 15% of GDP in FY12 to 24% at present.
Interestingly, personal income tax filers have outpaced corporate tax filers in terms of growth. From FY12 to FY21, personal income tax filers experienced a CAGR of 8%, reaching a total of 68 million. In contrast, corporate tax filers saw a slower growth rate of 5%, totaling 1 million in FY21. This divergence in growth rates, coupled with corporate tax cuts, has led to a significant increase in the share of individuals in total direct taxes, rising from 33% in FY12 to 50% currently. As a percentage of GDP, personal income taxes have also increased from 1.9% in FY12 to 3.0% in FY24E, according to Jefferies.
Despite the positive growth in individual tax collections and filings, the analysis reveals that the number of income tax return filers accounts for just 6.3% of the total adult population. Furthermore, only one-third of these filers, approximately 23 million individuals, actually pay taxes. The concentration of tax liability remains significant, with the top 5% of income earners responsible for 76% of personal income tax payments, a figure that has remained relatively stable over the past nine years. The government has implemented various measures, such as demonetization, the rollout of the Goods and Services Tax (GST), and the usage of PAN cards for large transactions, to improve tax disclosures. The ongoing formalization of the economy and the shift of labor from agriculture to salaried jobs are expected to contribute to the expansion of the income tax base in the long run.
The analysis also reveals the composition of income sources for individuals. Salary income and business income are the two main components, accounting for 47% and 45% of total income, respectively. Salary income has experienced a CAGR of 16% from FY12 to FY21, reaching Rs 25 trillion, primarily driven by an increase in the number of filers. On the other hand, business income, including proprietorships and consultants, has seen slower growth of 13%, totaling Rs 15 trillion. The average income for individuals declaring business income is Rs 0.5 million, while salaried individuals have an average income of Rs 0.79 million.
Another noteworthy finding is the significant increase in capital gains reported in FY21 returns. The contribution of capital gains to total individual income more than doubled year-on-year, reaching 7.6%. The number of filers reporting capital gains has also more than doubled over the past three years, partly due to improved disclosure and data tracking.
The analysis by Jefferies also highlights the impact of corporate tax cuts. While the effective tax rate for individuals has remained stable at 11-12% of income over the past decade, corporate India has seen a significant reduction in tax with rates declining by 7.6 percentage points to 23.5% in FY21.
In conclusion, Jefferies Research’s analysis of personal income tax data over the past ten years reveals several key trends. While the number of income tax filers has increased, the percentage of filers who actually pay taxes has decreased due to higher rebate options. The concentration of tax liability among the top 5% of income earners remains significant, with this group contributing the majority of personal tax collections. Moreover, personal income tax filers have outpaced corporate tax filers in terms of growth, emphasizing the need for efforts to improve tax compliance and expand the income tax base. With ongoing economic formalization and shifting labor trends, India aims to enhance its tax system in the long run.
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