India’s Income Tax Burden: Mere 0.3% of adult population account for 76% of total personal IT receipts

• Total taxpayers have grown by 8% CAGR over 10 years to 71 mn as compliance improves. This still is merely 6.3% of India’s adult population.
• The percentage of individual tax filers who actually pay taxes has dropped to 33% due to higher rebate options, shows a study done by Jefferies.
• Incomes of individual filers have risen from 15% of GDP in FY12 to 24% in the present day, which has contributed to higher compliance.
  

India may hold the distinction of being the world’s most populated country but only a small fraction of its population pay taxes. Data shows that currently India has 66.5 million individuals who pay personal income tax, which is 4.8% of total population and 6.3% of the adult population. Of this tax paying populace, 3.2 million individuals (0.3% of the adult population) account for 76% of total personal income tax receipts of the government. There is no doubt that overall compliance has been rising steadily, but personal income tax payers are still a very small portion of the population. In FY12, 31 mn individuals paid income taxes, but now this figure has jumped to 71 mn in FY23.

According to a recent analysis of personal income tax data over a ten year period conducted by Jefferies Research, a global investment bank, the number of income tax filers has experienced a compound annual growth rate (CAGR) of 8%, reaching a total of 68 million. In contrast, the number of corporate income tax payers has grown by 5% CAGR to 1026 from 581 in FY12. However, the percentage of individual tax filers who actually pay taxes has dropped to 33% due to higher rebate options.

One striking finding from the analysis is that the top 5% of income tax filers, which represents only 0.3% of adults, contribute a staggering 76% of the total personal tax collected. Additionally, the number of taxpayers with incomes exceeding Rs 0.5 million (Rs 5 lakh), Rs1.5 million (Rs 10.5 lakh), and Rs5 million (Rs 50 lakh) has all seen robust growth, with a CAGR of 17-20%. This indicates a rising compliance among individuals, as incomes of individual filers have risen from 15% of GDP in FY12 to 24% in the present day.

Interestingly, personal income tax filers have outpaced corporate tax filers in terms of growth. Over the period from FY12 to FY21, personal income tax filers experienced a CAGR of 8%, reaching 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, says Jefferies.

Despite the positive growth in individual tax collections and filings, the analysis reveals that the number of IT return filers accounts for just 6.3% of the total adult population. Furthermore, only one-third of these filers, approximately 23 million individuals, are actually paying 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 highlights the composition of income sources for individuals. Salary income, accounting for 47% of total income, and business income, comprising 45%, are the predominant components. The study reveals that salary income has grown at a CAGR of 16% over the period from FY12 to FY21, reaching Rs25 trillion. The growth in salary income is primarily driven by an increase in the number of filers, which reached 31 million in FY21, contributing to 70% of the overall growth. The remaining 30% of the growth can be attributed to rising average salaries. On the other hand, business income, including proprietorships and consultants, has experienced relatively slower growth of 13%, amounting to Rs15 trillion. The analysis also indicates that the average income for individuals declaring business income is Rs0.5 million, coinciding with the non-taxable income limit. In contrast, salaried individuals have an average income of Rs0.79 million, which may be attributed to the easier traceability of salaries through the Tax Deducted at Source (TDS) mechanism compared to business income, which relies on self-declaration.

Another noteworthy finding is the significant increase in capital gains reported in FY21 returns. The contribution of capital gains, including both short-term and long-term gains, to total individual income more than doubled year-on-year, reaching 7.6%. Moreover, the number of filers reporting capital gains has also more than doubled over the past three years. This surge in capital gains can be partly attributed to the impact of rising disclosure and data tracking, with return forms now pre-filled with such information.

The analysis done by Jefferies also sheds light on 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 enjoyed a significant tax reduction following the government's announcement in 2019. Effective corporate tax rates have declined 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.



The analysis also highlights the faster growth of personal income tax filers compared to corporate tax filers, resulting in a higher share of individuals in total direct taxes. The study emphasizes the need for continued efforts to improve tax compliance and expand the income tax base, particularly as the economy matures.