India: 0.4% of Main workers pay 80% of Personal Income taxes

The income tax department's release of tax payer data for 2012-13 revealed clear evidence of black money making up for a significant proportion of the economy. 

However, the statistics also reveal a dismal picture of the nature of how income is distributed in the country.

Firstly, only 12.5 million out of the 363 million main workers paid tax in 2012-13. That is 3.4% of the main worker population (census 2011) in India. The income tax department also reported that 29 million filed returns which means that 8% are engaged with the direct taxes department that year. However, if one were to exclude those engaged in farming (55% of the workers approx), these numbers would go up significantly to 8.5% and 19.6% respectively

Even if we were to include farming, NSSO data (Jan-Dec 2013, Situation of Agri households) suggests that the base of farmers who may qualify to pay taxes will not exceed 3.8 million. And most of these farmers would be at the lower end of the income spectrum.

Looking at the distribution of income, the statisics are stunning!

The top 0.05% of main workers or 167571 people in India pay 43% of personal income taxes (Rs 49206 crores, 2012-13)

The top 0.4% of main workers or 1390241 people in India pay 80% of personal income taxes (Rs 91089 crores, 2012-13)

One argument for these dismal figures is that large number of citizens are not paying any taxes in India. However, census 2011 also reveals that only 12 million households had availability of a 4 wheeler in India, which is close to the 12.5 million who paid direct taxes in 2012-13. So prima facie, one cannot make an argument for higher coverage. edit (2nd May)-This is supported by recent comments by the Minister of State for Finance as well. It is therefore likely that bulk of the black money also comes from these tax paying/ returns filing households, many of whom may be declaring very low incomes. 

Either way, the fact that 80% of the tax is being paid by just 0.4% of main workers is a shocking fact. It shows that either the Government's tax machinery is in very poor shape OR the fact that our incomes are absolutely concentrated in the top 12-15 million households (5% of households). Given the evidence of booming luxury car market and Iphone sales while the economy is just about recovering, I am inclined to believe in the latter.  The increase trend of crime in India could also be linked to this concentration of income at the top.

Policy makers should quickly get to the bottom of both these issues - black money and economic disparity and find solutions to take the rest of the 250 million households (95% of households) to the next level. It must be a top priority of this Government.