If all tax-payers pays the tax, how it benefited to India and their citizen

Nation benefits if everyone pays the taxes

The message “Salary credited to your account” brings the joy to any individual but when it comes to payment of the taxes it is disheartening.  Along with rising cost of living, taxes become the biggest burden for the individuals and often raises the question – Where is the taxes I pay is used?  The question is very much obvious particularly when there no benefits like social security measures in India unlike west, no health insurance or infrastructure like roads, bridges like developed nations, the problem is that only small portion of the India’s population is paying the taxes which gets redistributed among 1.37 billion people. But still given the demographic advantage India enjoys what if majority of them pay the taxes then benefits will multiply and facilitate the overall development of the country.  Let’s understand in detail, significance of the payment of the taxes in the nation development, India’s population topography and how it can lead to help the country to grow further.

Significance of paying taxes

Payment of taxes often pinch the individual’s pockets but taxes have been major source of income for the government.  Like for instance, in India, two types of taxes – direct (levied on the income) and indirect (on purchase of goods or services availed) are levied on the individuals and corporates.  Income tax, capital gains tax and corporate tax are some of the key direct taxes paid by individuals and entities in India.  Goods and services tax (GST), customs and excise duties are some of the indirect taxes.  Both this form of taxes become major source of income for the government to run the country.  This is evident from the recently unveiled Union Budget on February 1, 2021 where 53% of the money comes to government of in form taxes which is income tax, corporation tax, GST, excise and customs duties. Government also resorts to market borrowing to raise the money required to run the economy. 

Money comes in for the government

Source: Union Budget document

Money spent by the government

Source: Union Budget document

The government uses that tax money collected from citizen and corporate entities on improving quality of life by spending it on education, healthcare system, strengthen the defence, research and development, infrastructure, several welfare schemes, transfer of taxes and duties to states and interest on the loans taken by the government.  Government also spends the money towards pension for senior citizens and also subsidies given on food, fertilizers and LPG etc.  In addition, as seen recently government also announced stimulus measures to uplift the sluggish economy from the pandemic.  Like for instance, in 2020, the government has also announced huge stimulus package named “Atmanirbhar Bharat 3.0” amounting to Rs 2.65 lakh crore (15% of the GDP) to revive the economy which was badly hit by the pandemic.

Given the significance of the taxes in the nation development, imagine in a country like India which enjoys demographic dividend will stand to gain.  Demographic dividend refers to higher labour force than the population dependent on it. As evident in the chart below, United Nations World Population Prospects 2019 estimates, India will continue to have highest number of working age group population (15-59 years) compared to other emerging and developed countries like China.  By 2025, India will have 64% of its population falling in this age group compared to 63% of China, 58% (US), 57% (UK) and 52% (Japan).  So, if all of these working population started paying taxes then the country stands to gain.

Source: United Nations World Population Prospects 2019

However, if we look at the statistics then Income tax department quoted that over 5.95 crore income tax returns (ITRs) for the fiscal year ended March 31, 2020 (2019-20) were filled by January 10, 2021. Filing of tax returns by individuals for 2019-20 has slowed while filing by businesses and trusts has increased. So, the reality is very few Indians pay the income tax. Why so?  We often hear that people try to hide their income or evade the taxes.  But this is not true. India’s tax structure is such that it results in tax burden falling on few Indians only.  

The income tax rules states that people earning less than Rs 2.5 lakh per year are exempted from tax.  Further the per capita income in India i.e. average amount of money a person gets in a year is low.  India’s per capita income in real terms (at 2011-12 prices) during 2020-21 is estimated to attain a level of Rs 85,929 as compared to Rs 94,566 in the year 2019-20 according to National Statistical Office (NSO).  So large part of the population may not qualify to pay taxes. Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act,1961. India been agrarian economy a large section of population income is not taxable. 

Further, individuals used a host of exemptions available under Section 80C, 80D, 24, 80E, 80G to reduce the tax outgo. All of these contributed to smaller tax base in India and puts a huge burden on a smaller percentage of population paying the taxes.  Government in the last few years have tried to bring more people under the tax net and have taken several initiatives which can help in checking the tax evasion by quoting of PAN, levy of taxes, penalties, surveys, inquiries etc.  Government also needs to focus on bringing in more transparency and improve the tax compliance rather than just changing the tax rates.  Till then for all those who are liable to pay the taxes continued to act responsibly and help to nation to grow further.